THE 


THEORY  OF  ACCOUNTS 


BY 


FREDERICK  S.  TIPSON,   C.P.A. 


SECOND  EDITION 
REVISED   AND   ENLARGED 


NEW  YORK 
ISAAC    MENDOZA    BOOK    CO. 

17  ANN  STREET 
1913 


COPYRIGHT,  1902,  BY 
F.  S.  TIPSON. 

COPYRIGHT,  1912,  BY 
ISAAC  MENDOZA 


PREFACE. 

This  volume  contains  all  questions  set  in  the  Theory 
of  Accounts  paper  at  the  New  York  State  semi-annual  ex- 
aminations for  Certified  Public  Accountants,  from  Decem- 
ber, 1896  (the  first  examination  held),  to  June,  1902, 
inclusive,  with  full  answers  and  explanations.  While  these 
answers  may  be  found  in  extended  and  various  forms  in 
textbooks  by  several  writers  on  accountancy  subjects,  they 
are  not  all  to  be  found,  as  far  as  I  am  aware,  in  any  one. 
Now,  while  it  is  claimed  that  the  answers  herein  set  forth 
contain  the  main  facts  bearing  on  the  subject,  they  do  not 
contain  them  all.  Nor  is  it,  I  deem,  expedient  that  they 
should.  For  it  is  by  no  means  contemplated  that  the  in- 
formation conveyed  should  be  got  up  "  by  rote,"  but  rather 
that  it  should  stimulate  inquiry,  study,  and  research  on  the 
part  of  the  reader  who  desires  to  master  the  technique  of 
the  subject. 

It  is  the  invariable  custom  of  the  author,  in  preparing 
students  for  C.  P.  A.  examinations,  to  teach  the  theory  of 
accounts  in  connection  with  examples  in  practical  account- 
ing, and  in  a  great  measure  to  lead  them  to  deduce  and 
formulate  the  theory  for  themselves ;  on  the  principle  that 
art  precedes  science,  and  that  a  proposition  should  be 
first  worked  out,  and  the  reasoning  process — the  "  how  " 

267761 


and  the  "  why  " — explained  afterwards.    To  use  this  book 
intelligently  then,  a  knowledge  of  bookkeeping  is  necessary. 

With  respect  to  nomenclature,  the  author  will  occasion- 
ally be  found  at  variance  with  many  distinguished  writers. 
In  most  textbooks,  items  of  revenue  expenditure  and  in- 
come are  referred  to  as  losses  and  gains.  It  would  seem 
more  reasonable  to  limit  their  meaning  to  "  contributory 
factors";  for  loss  or  gain  is  only  arrived  at  after  transfer- 
ring them  to  the  profit  and  loss  account,  and  determining 
by  preponderance  of  balances,  whether  a  loss  or  gain  has 
been  made.  An  article  published  by  the  author  on  the 
"  Profit  and  Loss  Account "  some  time  since,  has  been  in- 
serted in  the  body  of  this  work,  to  which  attention  is 
specially  drawn.  Again,  the  terms  "fund  "  and  "  account  " 
appear  to  be  used  very  frequently  indiscriminately.  It 
would  be  desirable  to  speak  of  a  "  fund "  when  a  debit 
balance  is  referred  to ;  an  "  account "  when  the  credit 
balance  corresponding  is  meant. 

The  extent  to  which  the  author  has  availed  himself  of 
the  works  of  Mr.  George  Lisle,  C.  A.,  Mr.  Lawrence  R. 
Dicksee,  F.  C.  A.,  Mr.  Francis  Gottsberger,  C.  P.  A.,  and 
others,  will  be  apparent  to  those  who  are  familiar  with  the 
productions  of  these  writers. 

FREDERICK  S.  TIPSON. 

December  15,  1903. 


PREFACE  TO  SECOND  EDITION. 

It  is  just  ten  years  ago  since  the  first  edition  of  this 
book  was  published.  The  entire  issue  was  disposed  of, 
and  the  volume  reported  "out  of  print."  The  constant 
requests  for  the  book  from  all  parts  of  the  world  have  led 
the  author  to  get  out  the  present  edition;  it  being  likely 
to  supply  a  somewhat  pressing  need. 

The  questions  and  answers  have  been  practically 
brought  up  to  date;  and  no  candidate  who  has  mastered 
the  contents  of  this  volume  need  have  the  slightest  doubt 
of  his  ability  to  pass  any  C.  P.  A.  or  Civil  Service  Ex- 
amination in  this  subject. 

The  student  is  advised  to  read  through  carefully,  each 
question  separately,  with  its  answer,  twice — making  sure 
that  he  understands  it:  then,  putting  the  book  aside  he 
should  write  out  the  answer  in  his  own  words.  No 
attempt  should  be  made  to  memorize  the  answer.  This 
exercise  will  give  him  self-confidence,  and  facility  in 
expression;  both  qualities  being  of  first-class  importance 
to  a  candidate  in  any  examination. 

The  author  desires  to  gratefully  acknowledge  the  receipt 
of  some  hundreds  of  congratulatory  and  commendatory 
letters — the  contents  of  which  his  modesty  deters  him 
from  publishing. 


It  will  be  noticed  that  the  same  question  has  necessarily 
been  asked  more  than  once.  In  some  cases  the  wording  of 
the  answers  has  been  changed  so  as  to  avoid  meaningless 
repetition ;  in  others  the  reader  has  been  referred  to  ques- 
tions where  answers  will  be  found. 

At  the  moment  of  going  to  press  a  copy  of  the  following 
decision  of  Chief  Magistrate  William  McAdoo,  defining  the 
law  governing  Certified  Public  Accountants,  has  just  been 
forwarded  to  me  by  the  esteemed  Secretary  of  the  New 
York  State  Society  of  Certified  Public  Accountants,  Mr. 
S.  D.  Patterson,  C.  P.  A.,  and  I  deem  it  of  such  import- 
ance to  professional  accountants  and  to  the  public  gen- 
erally as  to  warrant  its  insertion  here. 

CERTIFIED  PUBLIC  ACCOUNTANTS. 

Use  of  Letters  "  C.  P.  A."— Section  80,  81  and  82  General 

Business  Law. 


FIRST  DEPARTMENT 

CITY  MAGISTRATE'S  COURT— FIRST  DIVISION. 

November,  1912. 

TJTE  PEOPLE  OF  THE  STATE  OF  NEW  YORK  on  the  relation 
of  FRANCIS  R.  CLAIR,  as  Chairman  of  the  Committee 
on  Violations  of  the  New  York  State  Certified  Public 
Accountants  Society,  v. 
BLANK,  defendants. 

A  person  using  the  letters  "C.  P.  A.,"  signifying  "certified  public  account- 
ant," after  his  name,  unless  he  has  complied  with  the  provisions  of 
sections  80  and  81  of  the  General  Business  Law,  is  guilty  of  the  offense 
prescribed  by  section  82  of  said  law. 


A  person  is  not  entitled  to  use  the  letters  "0.  P.  A."  in  connection  with 
his  business  in  this  State  because  he  is  a  certified  public  accountant 
duly  registered  as  such  in  another  State. 

A  certified  public  accountant  in  the  State  of  New  York  may  not  legally,  in 
conjunction  with  others,  whether  certified  public  accountants  or  not1, 
form  a  corporation  and  act  as  a  company  conducting  his  and  their 
business. 

Although  a  firm  name  is  used  by  public  accountants  and  one  of  its  mem- 
bers is  a  certified  public  accountant,  the  letters  "C.  P.  A."  may  be  used 
only  with  his  individual  name. 


O'Gorman,  Battle  &  Marshall  (Albert  Blogg  Unger  of 
counsel)  for  complainant;  John  Thomas  Smith,  A.  Par- 
ker Nevin  and  Meyer  B.  Cushner  for  defendants. 

McAdoo,  Ch.  Magistrate — This  case  comes  before  the 
court  on  a  summons  issued  on  the  instance  of  persons 
desiring  to  enforce  the  provisions  of  article  8,  sections  80, 
81  and  82  of  the  General  Business  Law  (Consolidated  Laws 
of  the  State  of  New  York,  1909,  page  1193),  so  far  as  the 
same  relates  to  public  accountants  using  the  letters  C.  P. 
A.  or  the  words  certified  public  accountant  after  their 
names  without  being  duly  authorized  to  do  so  by  the  per- 
sons specified  in  said  act. 

"  Sec.  80.  Certified  public  accountants.  Any  citizen 
of  the  United  States,  or  person  who  has  duly  declared  his 
intention  of  becoming  such  citizen,  residing  or  having  a 
place  for  the  regular  transaction  of  business  in  the  State, 
being  over  the  age  of  twenty-one  years  and  of  good  moral 
character,  and  who  shall  have  received  from  the  regents 
of  the  university  a  certificate  of  his  qualifications  to  prac- 
tice as  a  public  expert  accountant  as  hereinafter  provided, 
shall  be  styled  and  known  as  a  certified  public  accountant ; 


and  no  other  person  shall  assume  such  title,  or  use  the 
abbreviations  C.  P.  A.,  or  any  other  words,  letters  or 
figures  to  indicate  that  the  person  using  the  same  is  such 
certified  public  accountant. 

"  Sec.  81.  Eegents  to  make  rules.  The  regents  of  the 
university  shall  make  the  rules  for  the  examination  of 
persons  applying  for  certificates  under  this  article,  and  may 
appoint  a  board  of  three  examiners  for  the  purpose,  which 
board  shall  be  composed  of  certified  public  accountants. 
The  regents  shall  charge  for  examination  and  certificate 
such  fee  as  may  be  necessary  to  meet  the  actual  expenses 
of  such  examinations,  and  they  shall  report  annually  their 
receipts  and  expenses  under  the  provisions  of  this  article 
to  the  State  Comptroller,  and  pay  the  balance  of  receipts 
over  expenditures  to  the  State  Treasurer.  The  regents  may 
revoke  any  such  certificate  for  sufficient  cause  after  written 
notice  to  the  holder  thereof  and  a  hearing  thereon. 

"  Sec.  82.  Misdemeanor.  Any  violation  of  this  article 
shall  be  a  misdemeanor." 

Briefs  have  been  filed  with  me  by  counsel  for  various 
defendants  who  would  be  affected  by  this  law,  in  which 
the  main  contention  is  that  it  is  unreasonable  and 
violative  of  the  State  and  Federal  Constitutions  in 
that  it  seeks  to  monopolize  the  right  to  the  title 
C.  P.  A.  in  certain  persons  to  the  exclusion  of  others. 
I  do  not  believe  it  is  within  the  province  of  a  mag- 
istrate to  pass  upon  the  large  question  here  pre- 
sented, but  I  am  free  to  say  in  passing  that  the  cases  cited, 


being  those  with  regard  to  insurance  agents,  undertakers 
and  plumbers,  do  not  appear  to  me  to  be  analogous  to  the 
case  at  bar.  Those  laws  excluded  all  persons  from  acting 
as  fire  insurance  agents,  plumbers,  embalmers  or  under- 
takers unless  they  complied  with  certain  provisions  of 
statutory  enactment.  The  General  Business  Law,  as 
applied  to  public  accountants,  does  not  do  so.  It  does  not 
prevent  any  one  from  acting  as  a  public  accountant.  The 
legislature  has  recognized  an  existing  fact,  to  wit,  that 
to  be  a  public  accountant  requires  specialized  learning, 
training  and  aptitude  for  a  work  of  great  importance  to 
the  general  public.  The  expert  public  accountant  is  gen- 
erally recognized  as  a  professional  man,  and  as  such  his 
services  are  called  into  requisition  not  only  by  individuals, 
companies  and  corporations,  but  by  governments — local, 
State  and  national.  Great  and  important  results  depend 
upon  his  ability,  skill  and  integrity.  Eecognizing  these 
facts,  the  State  of  New  York  has  standardized  the  degree 
of  efficiency  and  other  requirements  which  it  considers 
necessary  to  allow  a  man  to  put  the  letters  after  his  name. 
C.  P.  A.,  meaning  certified  public  accountant.  This  term 
"certified  public  accountant"  under  this  law  means  that 
the  person  so  using  this  designation  has  complied  with  the 
standard  requirements  of  the  State  authorities,  that  is,  that 
he  has  been  tested  and  has  been  found  to  come  up  to  the 
standard  adopted  by  the  State,  and  that  he  can  so  hold 
himself  out  to  the  public.  The  law  simply  says  to  the 
citizen  who  requires  the  services  of  a  public  accountant 


that  the  person  writing  the  letters  C.  P.  A.  after  his  name 
has  been  found  by  the  State  authorities  to  meet  with  cer- 
tain requirements  in  examination  tests  which  show  him  to 
be  a  fit  person  to  do  the  work  required  of  men  of  his  call- 
ing. It  does  not,  however,  give  him  a  monopoly  of  the 
business.  Any  citizen  is  free  to  employ  either  a  public 
accountant  or  a  certified  public  accountant.  With  that 
choice  the  State  does  not  concern  itself  in  any  way.  There 
is,  therefore,  no  such  monopoly  as  is  created  for  other  pro- 
fessions, such  as  law  and  medicine,  where  no  one  can  prac- 
tice either  profession  unless  he  has  met  the  requirements 
of  the  State  and  has  been  duly  licensed  to  engage  in  such 
profession.  The  letters  C.  P.  A.  in  connection  with  the 
profession  or  business  of  a  public  accountant  is  a  sort  of 
sterling  mark  by  which  the  State  says  that  the  particular 
person  using  this  designation  is  competent  according  to 
its  standards  to  perform  the  work  which  he  solicits  from 
the  public-  Under  this  law  any  citizen  of  the  United 
States  or  any  one  who  has  declared  his  intention  of  be- 
coming a  citizen,  residing  or  having  a  place  for  the  regular 
transaction  of  business  in  this  State,  being  over  the  age 
of  21  years  and  of  good  moral  character,  has  the  right  to 
make  application  and  submit  himself  to  the  tests  given  by 
the  Eegents  of  the  University  of  this  State. 

I  see,  therefore,  no  reason  to  depart  from,  the  plain  re- 
quirements of  the  statute,  and  I  find  that  no  one  has  the 
right  to  use  the  letters  C.  P.  A.,  signifying  "certified 
public  accountant,"  after  his  name  unless  he  has  complied 


with  the  provisions  of  this  law  and  has  been  certified  by 
the  Regents  of  the  University  of  the  State  of  New  York. 

In  some  of  the  other  cases  before  me  the  question  is 
raised  whether  or  not  a  certified  public  accountant,  duly  reg- 
istered as  such  in  another  State,  can  so  act  in  the  State  of 
New  York  and  use  the  letters  C.  P.  A.  in  connection  with 
his  business.  I  think  that  to  do  so  would  be  plainly  evasive 
of  the  law  of  this  State  and  would  tend  to  make  it  of  no 
effect.  If  the  Legislature  had  intended  to  grant  this  right 
or  courtesy  to  certified  public  accountants  of  other  States 
it  would  have  said  so.  This  is  strikingly  shown  in  the 
Motor  Vehicle  Law,  chapter  374  of  the  Laws  of  1910,  as 
amended  by  chapter  491  of  the  Laws  of  1911,  subdivision  4, 
section  289,  which  says : 

"  No  person  shall  operate  or  drive  a  motor  vehicle  as  a 
chauffeur  upon  a  public  highway  of  this  State  after  the 
first  day  of  August,  nineteen  hundred  and  ten,  unless  such 
person  shall  have  complied  in  all  respects  with  the  require- 
ments of  this  section;  provided,  however,  that  a  non-resi- 
dent chauffeur,  who  has  registered  under  provisions  of  the 
law  of  the  foreign  country,  State,  territory  or  federal  dis- 
trict of  his  residence  substantially  equivalent  to  the  pro- 
visions of  this  section,  shall  be  exempt  from  license  under 
this  section;  and  provided,  further,  he  shall  wear  the  badge 
assigned  to  him  in  the  foreign  country,  State,  territory  or 
federal  district  of  his  residence  in  the  manner  provided  in 
this  section/' 

If  the  Legislature  had  intended  to  do  so  it  would  have 


been  an  easy  matter  to  have  provided,  as  in  the  Motor  Vehi- 
cle Law  above  cited,  that  certified  public  accountants  of 
other  States  having  a  law  substantially  equivalent  to  that 
of  this  State  in  regard  to  this  subject  should  be  allowed 
to  hold  themselves  forth  as  certified  public  accountants  in 
this  State. 

The  question  is  also  raised  in  another  case  at  bar  as  to 
whether  or  not  a  certified  public  accountant  in  the  State 
of  New  York,  in  conjunction  with  others,  whether  certified 
public  accountants  or  not,  can  form  a  corporation  and  act 
as  a  company  conducting  his  and  their  business.  If  this 
could  be  done  it  would  be  such  an  evasion  of  the  law  as  to 
practically  nullify  it  by  allowing  one  man  to  extend  the 
privilege  given  to  him  by  the  State  in  part  to  others  who 
had  not  complied  with  the  provisions  of  the  law  or  the 
requirements  necessary  to  authorize  them  to  designate 
themselves  «3  certified  public  accountants.  The  analogy 
suggested  between  them  and  law  firms  is  not  apparent.  All 
the  members  of  the  firm  in  that  case  are  duly  admitted 
members  of  the  bar,  who  have  complied  with  the  require- 
ments of  the  laws  of  the  State  in  order  to  be  able  to  prac- 
tice their  profession.  A  firm  name  could  be  used  as  public 
accountants,  and  if  one  of  the  members  is  a  certified 
public  accountant  that  fact  could  be  stated  by  having  the 
letters  C-  P.  A.  put  after  his  individual  name.  The  ex- 
clusive title  the  State  confers  upon  those  persons  who  have 
submitted  themselves  to  the  requirements  of  the  law  and 


passed  the  necessary  examinations  of  the  university  of  the 
State  is  "  certified/'  which  means  that  the  State  "  certifies" 
through   constituted   authorities  that   the  persons   using 
these  titles  are  competent  according  to  State  standards. 
The  State  says  in  effect  that  it  certifies  that  the  individual 
in  question,  being  properly  eligible?  has  submitted  himself 
to  certain  standard  requirements  and  tests  of  examination 
and  has  proven  himself  to  be  fit  to  exercise  the  function 
of  a  public  accountant.     How  can  he  delegate  the  right 
that  the  State  has  conferred  upon  him  to  others  in  a  part- 
nership by  having  one,  two  or  ten  partners  or  a  corpora- 
tion holding  themselves  or  itself  out  as  "  certified  "  public 
accountatns?     If  the  law  is  not  obviously  unreasonable 
and  unconstitutional  in  being  unreasonable,  then  any  at- 
tempt to  permit  people  from  other  States  to  use  the  desig- 
nation "  certified  public  accountant "  or  to  confer  this 
general  term  upon  a  corporation  or  partnership  because 
one  individual  in  it  has  that  right,  would  make  the  law  of 
no  effect.    If  the  Legislature  acted  within  its  constitutional 
rights  in  passing  this  law,  it  is  not  for  a  magistrate  to  say 
that  it  is  not  reasonable  from  his  individual  point  of  view, 
or  that  of  others  who  are  interested,  or  that  he  has  better 
judgment  than  the  representatives  of  the  people  in  the 
Legislature  assembled,  as  to  what  is  good  public  or  business 
policy  regarding  matters  within  their  control.    Magistrates 
do  not  make  laws;  that  belongs  to  the  Legislature.     Nor 
do  they  have  the  right  to  question  the  wisdom  of  the  Legis- 


lature  or  write  words  into  laws  that  are  not  there  originally 
The  Legislature  is  accountable  to  the  people  for  the  ex- 
ercise of  its  great  powers.  It  can  only  be  restrained  by  the 
courts  when  it  violates  its  constitutional  limitations- 

FREDERICK  S.  TIPSON. 
December  15,  1912. 


1.  £J*TATE   the  essential   principles    of   double    entry 
*y    bookkeeping  and  show  wherein  it  differs  from 
single  entry  bookkeeping. 

The  essential  principles  of  double  entry  bookkeeping 
are,  (1)  The  record  of  every  transaction  involving  the 
transfer  of  money  or  its  equivalent  must  appear  on  both 
the  debit  and  credit  side  of  the  ledger,  thus  maintaining 
it  in  balance.  (2)  Provision  must  be  made  for  the  con- 
stant differentiation  under  properly  classified  accounts  of 
capital  and  revenue  income  and  expenditure.  (3)  As  re- 
sulting therefrom,  the  profit  or  loss  determined  from  the 
collection  of  the  preponderance  of  the  balance  of  the  reve- 
nue accounts  must  be  proved  by  the  excess  of  the  assets 
over  the  liabilities  as  exhibited  in  the  balance  sheet. 

The  fundamental  difference  between  single  and  double 
entry  bookkeeping  is  this :  In  single  entry  the  income  and 
expenditure  accounts  are  not  kept,  and  the  profit  or  loss 
for  any  given  period  is  determinable  solely  from  a  com- 
parison of  the  assets  with  the  liabilities — the  excess  of  the 
one  over  the  other  showing  the  profit  or  loss;  the  proof  of 
the  accuracy  of  same,  through  the  same  result  being 
arrived  at  through  the  profit  and  loss  account  being  entirely 
wanting. 


8 

Of  minor  importance  also  is  the  fact  that  the  mathe- 
matical accuracy  of  the  posting  is  in  single  entry  bookkeep- 
ing undemonstrable  in  trial  balance  form,  as  in  double 
entry, 

2.  Describe  the  following  and  show  wherein  they  differ : 
(a)  trial  balance,  (b)  balance  sheet,  (c)  statement  of 
affairs,  (d)  realization  and  liquidation  account. 

(a)  The  "  trial  balance  "  is  an  extract  from  the  ledger 
of  all  the  balances — debit  and  credit.  If  the  posting  has 
been  correctly  performed,  the  total  of  all  the  debit  bal- 
ances will  exactly  equal  the  total  of  the  credit  balances. 
(&)  The  balance  sheet  is  an  exhibit  of  all  the  assets  and 
liabilities  of  a  business  at  a  particular  moment  of  time  in 
summarized  form,  (c)  A  statement  of  affairs  is  an  ex- 
hibit of  the  assets  and  liabilities  of  an  insolvent  concern, 
showing  on  the  one  side  in  summarized  form  the  nominal 
assets  as  taken  from  the  Ledger  extended  into  a  second 
column  stating  the  amount  they  are  expected  to  realize; 
on  the  other,  the  liabilities  extended  into  a  second  column 
stating  the  amounts  which  are  expected  to  rank.  Preferred 
claims  are  deducted  from  the  assets,  and  the  excess  of  the 
liabilities  over  the  assets  is  the  amount  of  the  deficiency,  or 
measure  of  insolvency,  (d)  A  realization  and  liquidation 
account  is  designed  to  show  in  condensed  form  the  result 
of  the  winding  up  of  the  affairs  of  a  business.  It  is 
charged  with  the  total  amount  of  the  assets  and  credited 
with  the  total  amount  of  the  liabilities,  exclusive  of  capi- 


tal.  It  is  charged  with  the  amount  expended  to  liquidate 
the  liabilities,  together  with  any  expenses  attendant  there- 
on, and  credited  with  the  total  amount  realized  by  the 
assets.  If  the  debit  side  exceed  the  credit,  the  excess  is  a 
loss  and  should  be  credited  to  the  account  and  charged 
against  capital.  In  those  very  exceptional  cases  where  the 
credit  side  exceeds  the  debit,  the  difference  should  be 
debited  to  the  account  and  credited  to  capital.  To  sum  up, 
while  the  "trial  balance"  contains  the  balances  of  all  the 
accounts  in  the  ledger,  nominal  and  real,  the  "balance 
sheet"  contains  only  the  real  and  personal  accounts  in 
totals.  The  "statement  of  affairs"  groups  the  assets  and 
liabilities  as  shown  in  the  balance  sheet  with  estimates  as  to 
the  actual  amounts  to  be  realized  and  liquidated;  and  the 
"realization  and  liquidation  account"  records  the  actual 
transactions  with  the  resultant  increase  or  decrease  of 
capital. 

3.  In  devising  a  system  of  accounts  for  a  business,  what 
are  the  main  subjects  for  consideration,  and  in  what  order 
should  they  have  attention  ? 

In  devising  a  system  of  accounts  for  any  business  two 
principal  considerations  must  be  constantly  borne  in  mind : 

(1)  The  record  of  every  transaction  must  be  explicit  and 
self  explanatory;  (2)  every  transaction  must  be  properly 
classified,  so  that  the  total  results  for  any  period  may  be 
obtained  with  facility. 

Inasmuch  as  the  end  of  classification  of  sources  of  income 


10 

and  expenditure  is  to  determine  ultimately  the  amount 
of  profit  or  loss  in  the  sales  of  individual  departments  of  a 
business,  or  of  separate  classes  of  goods,  the  revenue 
accounts  should  be  so  designed  as  to  readily  furnish  such 
information.  The  introduction  of  columnar  cash  books, 
journals,  and  sales  books  would  be  important  factors  in 
this,  as  well  as  minimizing  the  mechanical  labor  of  posting. 
Next  should  come  the  division  of  the  accounts  in  the 
general,  purchase,  and  sales  ledgers;  each  of  which  should 
be  made  "self  balancing."  A  proper  system  of  internal 
check  should  be  arranged  for  to  ensure  as  far  as  possible 
the  detection  of  unintentional  or  fraudulent  errors. 
Finally,  the  handling  of  the  cash  should  be  such  as  to  call 
for  the  deposit  in  the  bank  of  every  amount  received,  and 
the  payment  of  every  amount  by  check,  except  petty  cash 
items. 

4.  Describe  the  following  and  show  wherein  they  differ : 
(a)  revenue  account,  (5)  trading  account,  (c)  profit  and 
loss  account,  (d)  deficiency  account. 

(a)  A  revenue  account  is  used  by  non- trading  concerns 
to  determine  the  amount  of  net  income  earned.  It  is 
charged  (at  the  end  of  a  fiscal  period)  with  the  debit 
balances  of  all  the  nominal  accounts  and  credited  with 
those  with  credit  balances.  The  excess  of  the  credit  side 
over  the  debit  side  of  the  account  indicates  the  amount  of 
the  net  revenue.  (&)  A  trading  account  is  designed  to 
show  the  gross  profit  on  trading,  t.  e.,  the  total  excess  of 


11 

the  amount  charged  for  goods  sold  over  their  purchase 
price,  together  with  any  expense  attendant  on  their  acquisi- 
tion. It  is  charged  with  the  amount  of  the  inventory  on 
hand  at  the  commencement  of  a  fiscal  period,  and  with 
the  cost  of  all  goods  purchased  during  the  same.  It  is 
credited  with  all  sales  and  with  the  inventory  at  the  end 
of  the  period — the  excess  of  the  credit  side  over  the  debit 
is  the  amount  of  the  gross  profit.  (c)  The  profit  and 
loss  account  is  the  revenue  account  of  a  trading  business, 
and  is  used  to  determine  by  preponderance  of  balance  of 
the  nominal  accounts  (all  of  which  are  periodically  closed 
out  into  it)  the  amount  of  the  net  profit  for  the  period 
under  review.  It  is  first  credited  with  the  amount  of  gross 
profit,  as  shown  by  the  merchandise  or  trading  account,  and 
charged  and  credited  with  the  debit  and  credit  balances  re- 
spectively of  the  nominal  accounts.  The  excess  of  the 
credit  side  over  the  debit  is  the  amount  of  the  net  profit. 
(d)  A  deficiency  account  is,  or  should  be,  the  regular  ac- 
companiment of  a  statement  of  affairs.  It  is  charged  with 
the  deficiency  shown  by  the  statement  of  affairs,  and  with 
the  amount  of  the  capital  account.  It  is  credited  with  the 
shrinkages  as  exhibited  in  the  difference  between  the  nomi- 
nal assets  and  the  amounts  they  are  expected  to  realize; 
with  the  expenses  of  the  business,  and  with  the  amount 
withdrawn  from  the  business  by  members  of  the  firm.  The 
account  should  then  balance  exactly.  It  is  designed  to 
show  in  condensed  form  what  has  become  of  the  capital  in- 
vested and  how  the  deficiency  was  caused. 


12 

5.  State  the  purposes  for  which  series  of  perpendicular 
columns  are  employed  in  books  of  original  entry  and  how 
these  purposes  may  be  accomplished  relative  to  the  follow- 
ing conditions:    (a)  several  ledgers  comprehended  in  one 
system  of  accounts,  (b)  several  departments  comprehended 
in  one  business,  (c)  several  accounts  comprehended  in  in- 
come and  expenditure. 

The  general  purpose  of  the  columnar  system  in  books 
of  original  entry  is  first  to  facilitate  classification  and  anal- 
ysis, and  second  to  minimize  the  amount  of  posting. 

(a)  Where  several  ledgers  are  comprehended  in  one 
system  of  accounts,  by  means  of  the  columnar  system,  the 
total  amount  charged  and  credited  in  each  ledger  can  be 
seen  at  a  glance,  and  by  these  totals  an  adjustment  ac- 
count for  each  ledger  can  be  kept,  rendering  each  self-bal- 
ancing. 

(b)  Where  several  departments  are  comprehended  in 
one  business,  the  columnar  system  admits  of  the  analysis  of 
the  income,  expenditure,  and  profit  or  loss  attending  the 
conduct  of  each  department  separately. 

(c)  Where  several  accounts  are  comprehended  in  in- 
come and  expenditure,  the  columnar  system  readily  adapts 
itself  to  the  most  minute  classification,  affording  explicit 
information  on  points  of  detail  while  curtailing  the  labor 
of  posting. 

6.  Describe  the  following  and  show  wherein  they  dif- 
fer: (a)  statement  of  income  and  expenditure,  (b)  state- 
ment of  receipts  and  payments. 


13 

(a)  A  statement  of  income  and  expenditure  is  another 
designation     for    a    revenue    account.      It    is    charged 
with  all  expenses  for  the  period  under  review,  whether 
actually  paid  or  not,  and  credited  with  all  items  of  income 
earned  whether  received  or  not — the  excess  of  the  credit 
side  over  the  debit  indicating  the  net  income.     From  this, 
and  from  the  answer  to  question  No.  4,  it  will  be  seen  that 
three  different  terms  are  applied  to  virtually  the  same  ac- 
count— the  results  being  net  revenue,  net  profit  and  net 
income. 

(b)  A  statement  of  receipts  and  payments  is  a  cash 
statement  in  summarized  form  showing  the  cash  on  hand 
at  the  beginning  of  a  fiscal  period,  and  the  total  receipts 
and  payments  under  classified  headings  during  the  period ; 
the  excess  of  receipts  over  expenditures,  showing  the  bal- 
ance of  cash  on  hand  at  the  end  of  the  period. 

7.  Describe  a  method  of  keeping  accounts  so  that  the 
aggregate  sums  due  from  customers  and  due  to  creditors 
can  be  known  without  preparing  a  schedule  of  the  ac- 
counts of  such  customers  and  creditors,  and  so  that  an 
independent  balance  of  the  ledger,  containing  only  the  real, 
nominal,  special  and  controlling  accounts,  exclusive  of  the 
individual  accounts  of  customers  and  of  trade  creditors 
may  be  taken. 

Where  separate  ledgers  are  kept  for  customers  and  credi- 
tors, an  independent  balance  of  the  general  ledger 
can  be  taken  off  containing  the  total  amount  due  by  cus- 


14 

tomers  and  to  creditors  by  constructing  controlling  ac- 
counts. Supposing  the  general  ledger  to  be  correctly 
posted  if  two  accounts  be  opened,  one  called  customers'  con- 
trolling account,  and  the  other  creditors'  controlling  ac- 
count :  if  the  former  be  charged  with  the  total  amount  due 
by  customers  and  the  latter  credited  witH  the  amount  due 
to  creditors,  the  general  ledger  would  balance  by  itself. 

Taking  the  customers'  controlling  account;  if  at  the  end 
of  the  month  this  be  credited  with  the  total  amount  of 
cash  received  from  customers  and  discount  allowed  as 
shown  by  the  totals  of  the  cash  book  and  with  total  amount 
of  merchandise  returned,  if  it  be  also  charged  with  the 
total  amount  of  merchandise  sold  as  shown  by  the  sales 
book,  the  excess  of  the  debit  side  over  the  credit  would 
show  the  aggregate  amount  due  by  customers.  In  other 
words,  if  the  balances  of  the  customers'  ledger  accounts 
were  taken  off,  the  total  would  exactly  correspond  with  the 
total  amount  of  the  controlling  account  balance  in  the  gen- 
eral ledger.  The  same  principle  applied  to  the  creditors- 
controlling  account  would  show  a  balance  indicating  the 
aggregate  amount  due  to  creditors.  Thus  a  complete  trial 
balance  could  be  taken  from  the  general  ledger  and  the 
amounts  due  by  customers  and  to  creditors  shown  without 
the  necessity  of  waiting  for  detailed  balances  from  the 
several  customers'  and  creditors'  ledgers.  The  importance 
of  this,  where  the  personal  ledgers  contain  several  thou- 
sand accounts,  can  scarcely  be  over-estimated. 


15 

8.  Define    and    differentiate:     (a)   capital    and    reve- 
nue, (b)  capital  receipts  and  revenue  receipts,  (c)  capital 
expenditure  and  revenue  expenditure. 

(a)  Capital  in  its  broadest  sense  is  the  excess  of  the 
assets  over  the  liabilities  of  a  business.     It  is  often  defined 
as    the    amount    invested    in  a  business.      But  it  must 
be  borne  in  mind  that  it  is  a  fluctuating  quantity;  increas- 
ing or  decreasing  from  day  to  day  according  as  gains  or 
losses  are  made.     Revenue  is  (or  should  be)  the  resultant 
of  the  judicious  employment  of  capital.      At  the  end  of 
every  fiscal  period   revenue  by  transfer  becomes  capital 
accretion. 

(b)  Capital  receipts  are  the  amounts  received  for  em- 
ployment in  a  business  with  the  object  of  earning  a  reve- 
nue.   They  constitute  in  the  case  of  a  corporation  the  assets 
contributed  as  value  for  capital  stock.     Eevenue  receipts 
are  all  the  other  sources  of  income  of  a  business. 

(c)  Capital  expenditure  is  simply  the  replacement  of 
one  species  of  assets  by  another. 

Revenue  expenditure  is  what  is  spent  to  earn  a  revenue. 
The  excess  of  revenue  receipts  over  revenue  expenditure 
constitutes  the  net  revenue,  income,  or  profit  of  a  business. 
The  distinction  between  capital  and  revenue  expenditure 
may  again  be  briefly  stated  thus:  Capital  expenditure 
appears  upon  the  balance  sheet,  while  revenue  expenditure 
is  closed  out  into  the  profit  and  loss  account. . 

9.  How  may  the  accounts  in  a  trial  balance  be  best  ar- 


16 


ranged    to   facilitate   the   preparation   of   a   business   and 
financial  statement? 

(a)  Real  Accounts;  (b)  Revenue  or  Nominal  Accounts; 
(c)  Personal  Accounts;  (1)  Customers,  (2)  Creditors. 

10.  Define  and  differentiate :  (a)  fixed  assets  and  cash 
assets,   (b)  fixed  liability  and  floating  indebtedness,   (c) 
fixed  charges  and  operating  expenses. 

(a)  Fixed  assets  are  those  whose  retention  is  essential 
to  the  carrying  on  of  a  business — e.   g.,  plant  and  ma- 
chinery, furniture  and  fixtures,  &c.      Cash  assets  are  those 
which  consist  of  cash  or  can  be  readily  converted  thereinto, 
e.  g.,  Bills  Receivable,  Accounts  Receivable,  &c.      They 
constitute  the  real  working  capital  of  a  business. 

(b)  Fixed  liabilities  are  those  which  are  constant  and  do 
not  ordinarily  fluctuate,  e.  g.,  capital  stock,  bonds,  &c. 

Floating  indebtedness  implies  all  other  liabilities,  such 
as  Bills  Payable,  Accounts  Payable,  &c. 

(c)  Fixed  charges  are  those  which  reciir  periodically  as 
a  first-charge  against  income,  viz.,  interest  on  bonds,  etc. 

Operating   expenses   are   those   incurred   in   earning    a 
revenue. 

11.  Describe  the  following  kinds  of  accounts:  (a)  per- 
sonal, (b)  impersonal,  (c)  real,  (d)  nominal,  (e)  current, 
(/)  summary. 

(a)  Personal — with  persons. 

(b)  Impersonal — all  others. 


17 

(c)  Beal — those  representing  value. 

(d)  Nominal — those    regarding  revenue    income   and 
expenditure. 

(e)  Current — literally  running — one  containing  charges 
and  credits  usually  rendered  for  specially  agreed  on  periods. 

(/)  Summary — the  various  items  of  expenditure  and  in- 
come for  a  fiscal  period  expressed  in  totals. 

12.  Describe  the  process  and  state  some  of  the  pur- 
poses of  analyzing  a  ledger. 

Where  books  of  original  entry  have  been  lost  or 
destroyed  and  fraud  is  suspected  the  somewhat  tedious 
procedure  of  analyzing  the  ledger  is  adopted.  The  method 
pursued  is  as  follows :  A  sheet  of  paper  is  ruled  with  as 
many  columns  for  debits  and  credits  as  there  are  items 
in  the  books  of  original  entry.  Two  extra  columns  are  pro- 
vided for  the  debit  and  credit  balances  of  all  the  accounts 
at  the  commencement  of  the  period  from  which  the  analysis 
is  to  start.  Each  charge  and  credit  in  every  account  ii 
entered  under  its  proper  column  and  the  balance  (debit  or 
credit)  is  shown  in  columns  provided  for  same.  At  the 
end  of  the  period,  when  the  totals  of  the  columns  in  the 
analysis  sheet  are  completed  they  should  agree  with  the 
totals  of  the  books  of  original  entry  as  shown  in  the  nomi- 
nal accounts  in  the  ledger — or  if  procurable,  with  the  totals 
shown  in  the  books  of  original  entry  themselves. 

13.  Describe   the   nature   of  the   following  accounts: 
(a)  sinking  fund,  (b)  reserve  fund,  (c)  redemption  fund, 


18 

(d)  depreciation  fund,   (e)  contingent  fund,   (/)   invest- 
ment fund. 


(a)  A  sinking  fund  is  formed  by  setting  aside  period- 
ically and    investing    such    a    sum    as    will    in    a    given 
time  amount  to  the  total  of  a  stated  indebtedness  which  it 
is  desired  to  discharge.    It  would  be  well  if  more  discrim- 
ination were  shown  in  accountancy  nomenclature — so  as  to 
make  a  clear  distinction  between  a  "  fund"  and  an  "  ac- 
count " ;  the  generic  difference  between  them  being  that 
the  former  should  always  appear  as  a  debit  balance;  the 
latter  as  a  credit.     A  "  fund  "  should  always  rank  as  a  cash 
asset;  an  "account"  with  a  credit  balance,  while  repre- 
sented by  some  portion  of  the  assets  in  excess  of  all  other 
liabilities,  may  not  always  be  thus  available. 

(b)  A  reserve  fund  is  formed  by  a  charge  to  revenue 
periodically  of  such  an  amount  as  may  be  deemed  necessary 
to  hold  in  reserve  for  some  specific  purpose. 

(c)  A  redemption  fund  is  treated  in  the  same  way  as  a 
sinking  fund  and  practically  means  the  same  thing. 

(d)  A  depreciation  fund  is  formed  by  a  charge  to  rev- 
enue and  periodically  investing  a  certain  percentage  of  the 
book  value  of  plant,  machinery,  etc.,  to  replace  same  when 
worn  out. 

(e)  A  contingent  fund  is  formed  in  the  same  way,  but 
is  not  reserved  for  any  specific  purpose. 

(/)  An  investment  fund  is  that  portion  of  the  assets  of 
a  concern  which  is  invested  outside  the  business. 


10 

14.  Define  the  following:  (a)  stock,  (b)  capital,  (c) 
surplus,  (d)  deficiency,  (e)  capital  stock,  (/)  preferred 
stock,  (g)  common  stock,  (h)  share  capital,  (i)  loan  capi- 
tal. 

(a)  Stock  is  the  generic  term  applied  to  all  forms  of 
share  capital. 

(b)  Capital  in  an  ordinary  business  is  the  excess  of 
assets  over  liabilities.      In  a  corporation  it  is  the  amount 
of  its  share  capital. 

(c)  Surplus,  as  applied  to  corporations,  is  the  excess  of 
assets  over  liabilities  including  capital  stock;  it  is  really 
undistributed  profit. 

(d)  Deficiency  occurs  when  the  capital  is  impaired,  i.  e., 
when  the  assets  do  not  equal  the  liabilities,  including  capi- 
tal stock  as  a  liability. 

(e)  Capital  stock  is  the  term  applied  to  the  share  capital 
of  a  corporation  authorized — as  stated  in  its  articles  of  in- 
corporation.    It   is   represented   by   share   certificates   of 
specified  par  value. 

(/)  Preferred  stock  entitles  the  holders  to  a  fixed  rate  of 
dividend  before  any  be  paid  to  common  stock  holders.  It  is 
divided  into  two  classes:  cumulative  and  non-cumulative. 
In  the  former  case  if  a  dividend  be  not  earned  in  one  fiscal 
period  it  becomes  a  liability  on  the  next;  in  the  latter,  if 
the  dividend  be  not  earned  no  liability  on  such  item  is 
incurred. 

(g)  Common  Stock  is  the  ordinary  share  capital  of  a 
corporation  entitling  the  holder  to  such  a  share  in  the 


profits  in  the  form  of  dividends  as  may  be  declared  by  the 
directors  after  dividends  on  preferred  stock  have  been  paid. 
It  might  be  as  well  to  add  here  that  in  the  event  of  the 
dissolution  of  a  corporation,  preferred  stock  holders  have 
ordinarily  no  prior  right  over  common  stock  holders  in  the 
distribution  of  surplus  assets. 

(h)  Share  capital  is  the  term  applied  to  all  classes  of 
capital  stock  of  a  corporation  evidenced  by  share  certifi- 
cates. 

(i)  Loan  capital  is  money  invested  in  a  business,  or  bor- 
rowed temporarily  to  be  paid  at  some  specified  date. 

15.  Describe  the  nature  of  the  following  accounts :  (a) 
merchandise,  (b)  construction,  (c)  consignment,  (d)  joint, 
(e)  subscription,  (/)  expense,  (g)  maintenance,  (h)  ven- 
ture, (i)  suspense,  (/)  dividend. 

(a)  The  Merchandise  Account  is,  as  ordinarily  kept, 
nondescript;  being  when  active  partly  real  and  partly 
nominal;  but  when  closed  it  becomes  a  real  account,  the 
balance  representing  inventory.  It  is  designed  to  show  the 
gross  profit  on  trading.  It  is  debited  with  the  stock  on 
hand  at  the  commencement  of  a  fiscal  period,  with  all  pur- 
chases, and  items  returned  by  customers.  It  is  credited 
with  sales,  with  returns  to  creditors,  and  with  inventory  at 
close  of  said  period.  The  excess  of  the  credit  side  over  the 
debit  shows  the  gross  profit  which  is  carried  to  profit  and 
loss  account. 

(6)  The  Construction  Account  is  kept  to  show  the  cost 


21 

of  constructing  buildings,  plant,  railroad  beds,  &c.     It  is 
charged  with  all  expenses  connected  with  such  work. 

(c)  A  Consignment  Account  is  simply  a  trading  account 
kept  to  show  the  profit  or  loss  on  goods  consigned  to 
another  party  for  sale.     It  is  charged  with  goods  consigned, 
with  consignee's  expenses,  commission,  etc.,  and  credited 
with  sales.     If  a  profit  is  shown,  it  is  closed  out  into  the 
profit  and  loss  account. 

(d)  A  Joint  Account  is  a  trading  account  of  two  persons 
—partners  in  a  special  transaction.      The  profit  or  loss 
shown  is  credited  pro  rata  to  the  capital  or  personal  ac- 
counts of  those  jointly  interested. 

(e)  Subscription  Account  is  charged  with  that  portion 
of  the  capital  stock  of  a  corporation  which  is  offered  for 
sale.     It  is  credited  with  subscriptions  as  received. 

(/)  Expense  Account  is  a  generic  term  applied  to  those 
items  of  revenue  expenditure  whose  classification  is  not 
specifically  arranged  for. 

(g)  Maintenance  is  the  term  applied  to  an  account 
which  is  charged  with  those  expenditures  necessary  to  keep 
in  working  order,  t.  e.,  to  maintain  plant,  fixtures,  build- 
ings, &c. 

(h)  A  Venture  Account  is  a  trading  account,  containing 
the  particulars  of  some  transaction  outside  the  regular 
business  of  a  firm.  It  is  charged  with  the  cost  of  purchase, 
and  expense,  and  credited  with  sales.  It  is  a  combination 
of  a  merchandise  and  profit  and  loss  account. 

(t)  A  Suspense  Account  is  designed  to  contain  all  items 


22 

whose  ultimate  collection  is  doubtful.  When  an  account 
is  found  uncollectable,  it  should,  at  the  end  of  a  fiscal 
period,  be  credited  to  Suspense  Account  and  charged  to 
profit  and  loss. 

(;)  Dividend  Accounts  are  numbered  consecutively. 
When  a  dividend  is  declared,  it  should  be  charged  to  Sur- 
plus Account  and  credited  to  Dividend  Account.  When 
checks  are  mailed  to  stockholders,  they  should  be  charged 
to  Dividend  Account  through  the  cash  book — thus  closing 
the  account. 

16.  Describe  the  principal  books  of  account  of  some 
concern  with  which  you  are  familiar,  and  show  the  relation 
and  connection  of  these  books. 

For  an  ordinary  wholesale  trading  establishment  the 
following  books  would  be  required.  Their  inter-relation 
and  connection  are  shown  seriatim: 

(a)  Stock  book  to  contain  itemized  details  of  merchan- 
dise purchased,  with  cost  of  same,  date  of  purchase  and 
date  of  sale. 

(b)  Invoice  book,  in  which  to  paste  all  bills  of  goods 
purchased.     Totals  should  be  extended  and  added  monthly 
The  total  purchases  should  be  charged  to  merchandise  ac- 
count and  the  items  credited  to  the  firms  from  whom  the 
goods  were  purchased.    By  some  firms  a  purchase  journal  is 
used  instead.     By  means  of  this  a  careful  analysis  of  goods 
purchased  can  be  made  in  separate  columns,  and  the  totals 
charged  to  the  several  departments  of  a  business. 

(c)  Day  book  or  sales  book,  in  which  should  be  entered, 


23 

or  copied,  particulars  of  merchandise  sold  previous  to 
charging  same  to  debtors  in  ledger  and  crediting  total  to 
merchandise  account. 

(d)  Journal  for  all  entries  for  which  no  separate  book 
of  original  entry  is  kept. 

(e)  Cash  book — in  which  to  record  all  moneys  received 
and  paid  previous  to  posting  in  ledger.     Discounts  allowed 
and  received  should  also  be  entered  here. 

(/)  Bills  Eeceivable  and  Bills  Payable  Book- — in  which 
to  record  particulars  of  notes  given  and  received  previous 
to  charging  and  crediting  same  to  Bills  Eeceivable  and 
Bills  Payable  accounts  in  ledger. 

(g)  Pay  Eoll  Book — to  contain  details  of  wages  and 
salaries  paid. 

(h)  Credit  Book — divided  so  as  to  contain  particulars 
of  goods  returned  by  debtors  and  to  creditors  previous 
to  posting  in  ledger. 

(i)  Doubtful  Accounts  Ledger — to  contain  accounts 
whose  ultimate  realization  is  doubtful. 

(/)  Ledgers — Purchase,  Sales,  General  and  Private. 

(k)  Trial  Balance  book — in  which  to  preserve  a  record 
of  the  monthly  balances  of  all  accounts  in  ledger. 

17.  What  various  meanings  may  an  entry  in  a  ledger 
account  have,  on  (a)  the  debit  side,  (b)  the  credit  side? 

(a)  On  the  debit  side  a  ledger  entry  may  mean  (1) 
a  charge  for  merchandise  sold  to  a  debtor  or  returned  to  a 
creditor;  (2)  cash  paid  to  a  creditor,  or  discount  charged; 
(3)  a  note  payable  charged  to  a  creditor;  (4)  total  cash 


24 

received  during  the  month;  total  merchandise  purchased 
or  returned  by  debtors  during  same  period ;  total  discounts 
allowed  to  debtors,  or  total  expenditure  under  specific  heads 
— either  capital  or  revenue;  (5)  total  amount  of  notes  re- 
ceivable received  from  customers  in  settlement  of  their 
accounts  during  the  month. 

(I)  On  the  credit  side  a  ledger  entry  may  mean: 
(1)  A  bill  of  goods  purchased  from  a  creditor,  or  total 
sales  for  a  month  to  debtors,  or  total  amount  of  merchan- 
dise returned  to  creditors;  (2)  cash  paid  by  a  debtor  or 
discount  credited  to  him;  (3)  a  note  receivable  credited  to 
a  debtor;  (4)  total  cash  expended  during  the  month;  total 
discount  allowed  by  creditors;  (5)  total  amount  of  bills 
payable  given  to  creditors  during  the  month;  (6)  total 
capital;  (7)  surplus;  (8)  revenue;  (9)  other  liabilities 
under  specific  headings. 

18.  Show  the  advantages  and  the  disadvantages  of  the 
column  system  for  books  of  original  entry. 

The  principal  advantages  are:  (1)  the  ease  with  which 
thoroughness  of  classification  is  secured;  (2)  the  enor- 
mous saving  of  labor  in  posting;  and  (3)  the  consequent 
lessening  of  the  probability  of  errors  in  posting  resulting 
therefrom.  These  advantages  outweigh  the  disadvantages 
of  the  system,  which  are  the  ever  present  possibility  and 
likelihood  of  entries  being  made  in  wrong  columns,  and 
the  consequent  enlarged  opportunity  for  fraudulent  entries 
on  the  part  of  a  dishonest  employee. 


25 

19.  Describe  the  process  of  closing  the  ledger  of  a  mer- 
cantile firm. 

The  trial  balance  having  been  tested  and  found  cor- 
rect, the  inventory  of  stock  on  hand  is  credited  to  merchan- 
dise account,  and  the  gross  profit  determined  and  carried 
to  the  credit  of  profit  and  loss  account.  The  amount  of  the 
inventory  is  then  brought  down  as  a  debit  balance  in  mer- 
chandise account,  thereby  converting  it  into  a  real  account. 
A  proper  percentage  is  charged  off  plant  and  machinery  and 
furniture  and  fixtures  to  profit  and  loss  account.  All  nomi- 
nal accounts  with  debit  balances  are  closed  out  by  crediting 
them  and  charging  profit  and  loss  account;  and  all  those 
with  credit  balances  are  closed  by  debiting  them,  and  cred- 
iting profit  and  loss  account.  A  reserve  account  should  be 
created  for  bad  debts  and  discounts  and  if  after  charging 
them  to  the  profit  and  loss  account  a  credit  balance  is  shown 
the  said  balance  is  the  net  profit  for  the  period  under 
review.  This  should  be  closed  out  at  once  by  charging 
profit  and  loss  and  crediting  the  capital  accounts  of  the 
principals  of  the  firm  in  the  proportion  they  are  entitled  to. 

20.  In  what  ways  may  bad  or  doubtful  debts  be  dis- 
posed of  at  the  close  of  a  fiscal  period? 

Bad  debts  should  be  charged  at  once  to  Profit  and 
Loss  Account;  but  if  doubtful,  they  should  either  be  trans- 
ferred to  a  Suspense  Account,  or  into  a  "  Doubtful  Ac- 
counts" ledger  specially  ruled  for  that  purpose.  Of  course 
no  debt  should  be  charged  to  Profit  and  Loss  Account  until 


26 

it  has  been  definitely  ascertained  that  it  is  absolutely  un- 
collec table;  for  once  thus  transferred  its  reappearance  in 
any  shape  as  an  asset  may  be  regarded  as  doubtful. 

21.  What  are  the  functions  of  the  cash  book?  Describe 
the  peculiarities  of  one  or  more  cash  books  with  which  you 
are  familiar. 

The  functions  of  the  cash  book  are  to  record  in  detail 
and  in  gross  all  receipts  and  expenditures,  and  to  show  at 
any  time  the  balance  of  cash  on  hand.  The  peculiarities 
of  all  cash  books  consist  in  the  extent  to  which  the  column 
system  is  made  use  of. 

By  a  little  thought  this  may  be  so  planned  as  to  greatly 
curtail  the  labor  of  posting,  to  afford  considerable  detailed 
information,  and  to  constitute  an  indispensable  feature  in 
the  keeping  of  self-balancing  ledgers. 

22.  In  what  order  should  the  several  items  in  a  bal- 
ance sheet  be  placed  ?    Give  reasons  for  your  answer. 

The  following  is  the  proper  order  for  items  in  a  balance 
sheet : 

Assets.  Liabilities. 


1. 

2. 
3. 

4. 
5. 
6. 

7. 

Cash. 
Investments  —  secu  rities. 
Notes  receivable. 
Stock  on  hand. 
Accounts  receivable. 
Furniture  and  fixtures. 
Plant  and  machinery.      I 

1. 
2. 
3. 
4. 
5. 

Notes  Payable. 
Accounts  payable. 
Other  liabilities. 
Capital. 
Surplus. 

27 

The  reason  for  this  arrangement  is  that  the  assets  should 
always  appear  in  the  order  or  facility  of  their  realization; 
and  that  liabilities  should  stand  in  the  order  in  which  they 
would  ordinarily  be  liquidated. 

23.  Describe  a  bill  book  and  show  its  relation  to  (a) 
the  bills  receivable  account,  (b)  the  bills  payable  account. 

The  bill  book  is  generally  divided  into  two  parts: 
Bills  Receivable  and  Bills  Payable.  It  is  ruled  with  col- 
umns showing  date,  name  of  maker,  in  whose  favor  drawn, 
due  date,  amounts  and  any  remarks.  A  note  received  from 
a  customer  in  settlement  of  account  is  entered  in 
the  Bills  Receivable  book  and  posted  to  the  credit  of  the 
person  from  whom  received  at  once.  At  the  end  of  the 
month  the  total  amount  of  notes  received  is  debited  in 
the  ledger  to  Bills  Receivable  Account.  On  the  other 
hand  notes  given  to  creditors  in  settlement  of  accounts 
are  entered  in  the  bill  book  and  charged  to  creditors  at  once. 
Once  a  month  the  total  amount  of  notes  so  paid  out  is 
credited  in  the  ledger  to  Bills  Payable  Account.  When  the 
amount  of  a  note  is  received  or  paid,  it  is  credited  or 
charged  in  the  cash  book  to  Bills  Receivable  or  Bills  Pay- 
able Account,  and  the  balance  of  either  account  in  the 
ledger  will  always  show  the  gross  amount  owed  or  owing  on 
notes.  For  schedules,  reference  of  course  has  to  be  made 
to  the  Bill  Book. 

24.  How  should  one  proceed  to  detect  an  error  in  a 
trial  balance? 


First  verify  the  previous  trial  balance;  check  all  the 
footings  in  books  of  original  entry ;  check  all  postings  from 
same  into  ledger;  check  the  taking  off  of  ledger  balances, 
and  the  footings  of  the  trial  balance  book.  If  this  work 
be  done  thoroughly  the  error  will  generally  be  detected.  It 
is  very  important  to  make  clear  all  blurred  or  doubtful 
figures,  as  it  is  often  found  that  an  item  is  added  as  one 
figure  and  posted  as  another.  This  may  be  termed  the 
"  good  old-fashioned  "  method.  It  has  this  advantage :  it 
never  fails.  The  above  work  may  often  be  curtailed ;  espe- 
cially if  self-balancing  ledgers  be  in  use.  The  particular 
side  on  which  the  error  lies  can  generally  be  very  readily  de- 
termined, thus  cutting  the  work  of  checking  in  half.  If 
the  difference  is  exactly  divisible  by  "  9,"  a  transposition 
of  figures  may  be  looked  for;  and  if  by  "2,"  the  error  is 
probably  in  taking  off  and  placing  an  amount  on  the  wrong 
side  of  the  trial  balance.  Numerous  "  short  methods"  have 
been  invented  from  time  to  time;  but  experience — best  of 
teachers — generally  shows  that  there  is  no  method  so  good 
as  the  "  old-fashioned  "  one  of  "  calling  over." 

25.  State  various  ways  of  treating  the  bank  balance  in 
connection  with  cash  on  hand. 

In  most  English  cash  books  special  columns  are  ruled 
for  the  bank  account ;  one  for  deposits,  the  other  for  with- 
drawals. Thus  the  bank  balance  is  shown  at  a  glance. 
This  balance  added  to  checks  and  cash  undeposited  will  ex- 
actly equal  the  cash  balance  called  for  by  the  excess  of 


29 

receipts  over  expenditure  as  entered  in  the  cash  book.  In 
this  country,  however,  the  usual  plan  is  to  keep  the  bank 
account  on  the  stubs  of  the  check  book,  the  balance  being 
ascertained  by  deducting  the  one  side  from  the  other. 

26.  Describe  the  merchandise  account  as  ordinarily 
kept.  Show  how  it  may  be  subdivided  and  suggest  im- 
provements. 

The  Merchandise  Account  as  ordinarily  kept  is  a  non- 
descript kind  of  account,  partly  real  and  partly  nomi- 
nal when  active;  the  balance  of  which  represents  nothing. 
When  closed,  however,  it  becomes  a  real  account;  the  debit 
balance  representing  stock  on  hand  at  a  particular  date.  It 
is  usual  to  charge  the  account  with  stock  on  hand  at  the 
beginning  of  a  fiscal  period;  with  purchases  during  the 
period,  and  with  merchandise  returned  by  customers.  Sales 
made  and  merchandise  returned  to  creditors  during  the 
period  are  credited  to  the  account,  as  is  also  the  amount  of 
stock  on  hand  at  the  end  of  the  fiscal  year.  If  a  credit  bal- 
ance is  then  disclosed  it  represents  the  gross  profit  for  the 
period,  which  should  be  credited  to  Profit  and  Loss  Ac- 
count; but  if  a  debit  balance  appear,  it  represents  the  gross 
loss  for  the  period  which  should  be  charged  to  Profit  and 
Loss  Account. 

The  Merchandise  Account  should  be  subdivided  as  fol- 
lows: 

1.  Merchandise  Account — Purchases. 

2.  Merchandise  Account — Sales. 


30 

3.  Merchandise  Account — Eeturn  sales. 

4.  Merchandise  Account — Eeturn  purchases. 

5.  Merchandise  Account — Stock. 

Each  balance  would  then  represent  something  definite; 
and  the  comparative  statistics  derivable  therefrom  would 
be  of  utmost  value,  not  only  at  the  close  of  a  fiscal  period, 
but  also  at  any  time  during  said  period. 

27.  How  may  a  set  of  books  be  changed  from  single 
entry  to  double  entry  ? 

A  statement  of  assets  and  liabilities  should  be  made  up 
from  the  single  entry  books  and  from  subsidiary  records 
so  as  to  arrive  at  the  net  capital. 

All  impersonal  accounts  in  the  single  entry  ledger  should 
be  ruled  off.  One  journal  entry  "  Sundries  Dr.  to  Sun- 
dries" will  then  be  sufficient  to  bring  all  assets  and  liabili- 
ties not  appearing  on  the  old  ledger  into  account  and  con- 
sequently the  books  into  balance. 

Existing  personal  accounts  need  not  be  disturbed,  care 
being  taken  not  to  open  again  accounts  already  appearing 
on  the  old  ledger. 

28.  Describe  various  uses  of  the  journal. 

The  journal  is  used  (1)  to  contain  the  "opening" 
and  "closing"  entries  of  a  set  of  books ;  (2)  to  contain  those 
entries  for  ledger  posting  which  do  not  appear  in  other 
books  of  original  entry;  (3)  to  record  transfers,  which 


31 

should    always    be    accompanied    by   careful    explanatory 
notes. 

29.  What  are  the  functions  of  a  real  estate  account? 
What  entries  may  it  properly  have  on  each  side  ? 

The  functions  of  a  Real  Estate  Account  are  to  contain 
a  record  of  purchase  price  and  cost  of  improvements  and 
profit  on  the  debit  side,  while  it  is  credited  with  deprecia- 
tions and  sale  price  and  loss.  It  should  be  supplemented 
by  a  "  Real  Estate  Income  and  Expenditure  Account," 
which  should  be  charged  with  all  expenditures  not  enhanc- 
ing values,  and  credited  with  income  arising  from  the 
property. 

30.  Describe  the  stock  ledger  (shares  ledger)  of  a  cor- 
poration and  show  how  it  is  kept. 

A  corporation  stock  ledger  (shares  ledger)  is  used  for 
keeping  the  accounts  of  stockholders  in,  with  regard  to 
their  individual  shares  of  stock  in  the  corporation.  The 
first  account  should  be  the  capital  stock  account,  which 
should  be  charged  with  the  total  amount  of  stock  issued. 
Stockholders'  individual  accounts  should  be  credited  with 
their  holdings  and  thus  the  ledger  will  be  rendered  "self- 
balancing."  The  ruling  for  an  individual  account  is  ap- 
pended. 


DR. 


32 
JOHN  BROWN. 


CR. 


M 

Date 

Certificates 

m 

"8  1 

& 

Par 
Value 

Date 

Certificates 

In- 
stall- 
ments. 

"o  S 

& 

Pai 
Vak 

March 

6 
6 

Renewed 
by  No.  40 
Transf  d  to 
J.  Davis 

400 
100 

Feb'r 
March 

4 
6 

No  10  
No  40  

500 
400 

31.  What  are  the  main  features  of  difference  between  a 
trial  balance  taken  out  at  the  end  of  a  fiscal  year  before  the 
books  of  a  business  are  closed,  and  one  taken  out  imme- 
diately after  the  books  are  closed  ? 

A  trial  balance  taken  out  at  the  end  of  a  fiscal  year 
before  the  books  of  a  business  are  closed,  contains  the  bal- 
ances of  all  the  accounts  in  the  Ledger— nominal,  real  and 
personal.  After  the  books  are  closed,  the  trial  balance  con- 
tains only  the  balance  of  real  and  personal  accounts.  It 
is  really  a  "  Balance  Sheet "  proper  in  extended  form. 

32.  What  is  meant  by  (a)  capital,  (b)  working  capital? 
Why   is  capital   always  shown  on   a  balance  sheet  as  a 
liability? 

(a)  Capital  means,  (1)  the  excess  of  assets  over  liabili- 
ties of  a  firm.     The  term  is  also  applied  to  (2)  the  assets 
corresponding  to  the  liability  of  a  corporation  to  its  stock- 
holders as  evidenced  by  its  capital  stock. 

(b)  By  working  capital,  is  meant  all  assets  available  as 
cash  for  the  carrying  on  of  a  business.    Cash,  accounts  re- 


33 

ceivable,  bills  receivable,  etc.,  would  come  under  this  head ; 
but  plant  and  machinery,  good  will,  etc.,  would  not. 

Capital  is  shown  on  a  balance  sheet  as  a  liability  because 
a  business  is  liable  to  the  members  of  a  firm  or  corporation 
for  the  amount  standing  to  the  credit  of  investment,  or 
capital  stock  account. 

33.  Formulate  journal  entries  to  express  fully  each 
of  the  following  transactions : 

(a)  A  sale  of  goods  for  a  note  bearing  interest,  (b)  the 
discounting  of  the  above  mentioned  note  at  a  bank,   (c) 
the  annulling  of  a  personal  account  as  uncollectable,  (d) 
the  adjusting  of  an  interest  account  for  interest  earned  but 
not  yet  collected. 

Bills  Receivable,  Dr.,  to  Sundries. 

(amount  of  sale)  Merchandise  account, 

(amount  interest  on  note)        Interest  account. 

Note  received  in  payment  of  goods  sold  to  A.  B.  this 
day,  bearing  interest  at  6  per  cent  dated  January  10th, 
due  April  10. 

(b)  Sundries,  Dr., 

To  Bills  Receivable. 

Cash  account  (amount  received  from  bank  for  note). 
Discount  account    (amount  charged  by  bank  for  dis- 
count). 

(c)  Profit  and  Loss  account,  Dr. 

To  C.  D. 


34 

Account  returned  this  day  pronounced  "uncollectable," 
now  charged  off  as  per  order  of  (  ) . 

(d)  Accrued  Interest  Account,  Dr. 

To  Interest  Account. 

Interest  earned  but  not  collected  on . 


34.  Under  what  circumstances   is  a  patent  regarded 
as  an  asset  ?     After  a  patent  has  been  valued,  should  such 
value  be  considered  as  permanent?    Give  reasons  for  your 
answer. 

A  patent  may  be  regarded  as  an  asset  when  it  is  a  virtual 
lease  of  a  monopoly. 

It  should  not  be  considered  of  permanent  value  because 
its  existence  is  limited.  This  extermination  of  its  value 
should  be  provided  for  by  writing  off  to  depreciation  ac- 
count annually  such  an  amount  as  would  make  extinguish- 
ment of  value  coincident  with  the  expiration  of  the  patent 

35.  In  the  opening  of  a  ledger,  what  principle  should  be 
followed  as  to  the  order  of  arrangement  of  the  accounts? 
Show  the  advantages  of  different  plans. 

The  principle  to  be  followed  as  to  the  order  of  arrange- 
ment of  accounts  in  the  opening  of  a  ledger  should  ob- 
viously be  that  which  most  readily  facilitates  the  making 
up  of  a  balance  sheet  or  financial  statement  from  the  trial 
balance  when  taken  off.  Eeal  accounts  with  Dr.  balances 
would  naturally  come  first.  Next  the  nominal  accounts, 
and  then  personal  ones.  The  same  order  should  obtain 


35 

with  regard  to  accounts  ordinarily  showing  credit  balances. 
A  better  arrangement  would  be  as  follows: 

1.  Nominal  accounts.  2.  Real.  3.  Accounts  Receiv- 
able. 4.  Accounts  Payable. 

The  advantage  of  the  latter  method  is  that  if  the  nomi- 
nal accounts  be  kept  on  one  sheet  of  the  trial  balance  book, 
the  other  sheets  will  be  the  schedules  of  accounts  receiv- 
able, payable,  and  real  accounts. 

36.  Describe  a  set  of  books  for  a  commission  mer- 
chant.    Show  the  relation  of  each  book  to  the  other  books 
of  the  set. 

A  commission  merchant  should  have  the  ordinary  ledger, 
journal  and  cash  book,  and,  in  addition,  a  separate  stock 
book  and  sales  book  for  every  client  for  whom  he  sells 
goods.  On  receipt  of  goods  to  be  sold  on  commission,  he 
enters  quantities  in  stock  book  and  opens  an  account  in 
ledger  with  consignor,  charging  it  with  any  freight  and  ex- 
penses incurred  in  their  receipt.  All  sales  made  are  en- 
tered in  the  sales  book  of  the  consignor  as  made;  charged 
to  the  party  to  whom  sold,  and  the  total  of  these  sales 
credited  periodically  to  the  consignor's  account  on  the  led- 
ger. A  memorandum  is  made  in  stock  book  as  each  lot 
of  stock  is  sold,  which  then  constitutes  a  standing  inven- 
tory of  goods  undisposed  of.  When  settling,  he  charges 
the  consignor's  account  with  commission  and  expenses  in- 
curred in  selling,  and  remits  cash  for  the  balance. 

37.  State  what  is  meant  by  a  cost  sheet,  showing  its 


36 


advantages  and  how  it  is  made  up.  Give  a  form  of  cost 
sheet  for  some  manufacturing  business  with  which  you  are 
familiar. 

By  cost  sheet  is  meant  a  statement  in  detail  of  all  items 
which  enter  into  the  cost  of  manufactured  goods.  Its  ad- 
vantages are  as  follows :  The  ability  to  determine  quantity 
and  cost  of  raw  material,  manufactured  and  in  process  of 
manufacture ;  cost  of  labor;  proportion  of  fixed  charges 
and  incidental  expenses  to  be  added  to  manufacturing  cost, 
forming  a  stable  basis  on  which  to  base  selling  price  to 
obtain  a  given  percentage  of  profit. 


COST  SHEET  FOIt  A  CIGAR  FACTORY. 

MANUFACTURING    COST,    LABOR   AND   MATERIALS. 

MONTH    OF     190  .  .  . 

RAW    LEAF   DEPARTMENT. 


Corresponding 
Month  Last 

Previous 
Month  of 

Weight 

Year. 

Present  Year. 

Division 
of  Cost. 

No.  of 
Ibs.Raw 
LeafRe- 
ceived. 

si 

Deliv- 
ered in 
Ship- 
ping 

£ 

•2-S1 

Basis  — 
No.  of 

|l 

4 

Basis- 
No,  of 

M 

•a| 

?. 

o^ 

Dept. 

03  ^ 

Ibs. 

o1"1 

Ibs. 

§2 

** 

U 

HH 

0 

^ 

0 

Labor.  .  .  . 

Cartage.  . 

Storage  .  . 

Insurance 

Totals  . 

37 


STRIPPING    DEPARTMENT. 


Division 
of  Cost. 

| 

No.  of 
Ibs.  Re- 
ceived 
from 
Raw 
Leaf 
Dept. 

Cost  per 
100  Ibs. 

Weight 
De- 
livered 
to 
Rolling 
Dept. 

Loss  in 
Weight.  j 

Previous 

Month  Same 
Year. 

Loss  in 
Weight.  1 

Corresponding 
Month  Last 
Year. 

i 

Basis- 
No,  of 
Ibs. 

Cost  per 
100  Ibs. 

Basis  — 
No.  of 
Ibs. 

1 

Labor.  .  .  . 
Supplies  . 

Totals  . 

ROLLING   AND   BUNCH    MAKING. 


Division 
of  Cost 

Foreman's 
Labor.  . 
Rollers- 
Labor.  . 
Bunch 
Makers' 
Supplies.  . 

a 
< 

No.  of 
Ibs. 
Pre- 

SS? 

from 
Stpg. 
Dept. 

1 

No.  of 
Cigars 
Made 
De- 
livered 
toPkg. 
Dept. 

Previous 
Month  Same 
Year, 

Same  Month 
Last  Year. 

Basis- 
No,  of 
Ibs. 

jj 

t 

Basis  — 
No.  of 
Ibs. 

S.8 

ji 

• 

Totals  . 

PACKING    DEPARTMENT. 


No.  of 
Cigars 

Previous 
Month  Same 
Year. 

Same  Month 
Last  Year. 

Division 
of  Cost. 

Re- 
ceived 

Basis  — 

I 

from 
Bunch 
Making 

fi 

o 

No.  of 
CJgr. 

ceived. 

?o 
~ 

0 

Basis- 
No,  of 
Cigars. 

O 

Men's 

Labor  . 
Women's 

Labor  . 

Cases  at 

Cost... 

Wrappers. 
Labels... 

Supplies  . 

Totals  . 

38 

SUMMARY. 


Raw  Leaf  Dept. 
Stripping  Dept. 
Rolling  and  Bunch  Mkg. 
Packing  Dept. 
Total  Cost, 


Cost  per  thousand  present 


month 


Cost  per  thousand  last  month. 
Cost  per  thousand  last  year. 
Decrease  or  Gain  in  cost 

of —    — per  M. 
Depreciation  of  Building 
Depreciation  of  Plant. 


No.  of  Cigars  made  and  packed 

— Cost  per  M 

Loss  in  weight  present 


month . 


Loss  in  weight  last  month. 
Loss  in  weight  last  year. 
Decrease  or  Gain  in  loss 
of per  cent. 


Equal  to- — - — -per  M. 


Revenue  Stamps. 


38.  What  is  meant  by  the  good  will  of  a  business? 
Under  what  circumstances  does  it  become  important  to 
determine  the  value  of  the  good  will  of  a  business? 

By  Good  Will  ordinarily  is  meant  the  capitalized  value 
of  the  average  net  profits  of  a  business  for  a  certain  period. 
If  a  business  has  earned  for  a  period  of  say,  ten  years,  an 
average  profit  of  $10,000  per  annum,  and  the  books  show 
that  after  discharging  all  liabilities,  the  net  capital  of  the 
proprietor  is  $50,000,  it  is  very  evident  that  should  he 
desire  to  sell  his  business,  he  would  be  justified  in  asking 
more  than  $50,000  for  it.  Such  sum  as  he  asked  for  about 
$50,000,  would  be  Good  Will  value.  The  purchase  price 
for  Good  Will  varies  from  three  to  ten  years  of  the  average 
amount  of  net  profit  earned. 


39 

It  becomes  important  to  determine  the  value  of  the 
Good  Will  of  a  business  in  case  of  (1)  the  sale  of  a  busi- 
ness, or  (2)  of  its  being  absorbed  by  a  joint  stock  com- 
pany. The  substance  of  the  theory  is  this:  Good  Will 
is  the  presumption  that  the  old  customers  will  resort  to  the 
old  place. 

39.  Mention  five  classes  of  ledgers  and  describe  the 
peculiar  features  of  each  class. 

1.  Purchase  Ledger,  for  goods  purchased  and  credited. 

2.  Sales  Ledger,  for  sales  made  and  debited. 

3.  General  Ledger,  for  impersonal  and  real  accounts. 

4.  Private  Ledger,  for  such  accounts  as  it  is  considered 
desirable  to  keep  accessible  to  principals  only. 

5.  Stock  Ledger,  to  contain  record  of  shares  sold,  paid 
for,  transferred,  etc. 

40.  Describe  the  following,  and  state  the  disinguishing 
feature  of  each:  (a)  income  account,  (b)  surplus  account, 
(c)  suspense  account,  (d)  reserve  fund. 

(a)  Income  account  contains  the  entire  income  and  ex- 
penditure for  the  term  under  review,  whether  same  has 
been  collected,  or  remains  outstanding  at  close  of  fiscal 
period,  or  whether  same  has  been  paid,  or  is  still  a  lia- 
bility. 

(b)  Surplus  account  is  that  account  to  which  is  trans- 
ferred the  balance  of  net  profit  for  any  fiscal  period  as  dis- 
closed by  the  Profit  and  Loss  account.      From  the  "  sur- 
plus," dividends  are  declared,  and  when  declared,  total 


40 

amount  should  be  charged  to  surplus  account  and  credited 
to  dividend  account.  The  system  of  leaving  a  surplus  to 
the  credit  of  profit  and  loss  account  is  unscientific  and 
illogical. 

(c)  Suspense  account  is  charged  with  those  items  whose 
collection  or  realization  is  uncertain.      It  is  customary  to 
transfer  doubtful  accounts  to  this  "suspense"  and  close 
them  out  into  Profit  and  Loss  account  when  it  is  definitely 
ascertained  that  they  are  uncollectable. 

(d)  Reserve  Fund  is  a  proportion  of  profit  set  aside  for 
a  particular  purpose,  and  it  must  be  borne  in  mind  that  it 
should  only  be  used  for  the  purpose  designated.     Thus  it 
is  very  common  to  find  "reserve  for  bad  debts,"  "reserve 
for  depreciation,"  etc.      A  "  fund  "  should  be  represented 
by  a  debit  balance,  while   the   "account "   appears  as  a 
credit  balance. 

41.  Define  (a)  funded  debt,  (b)  floating  indebtedness, 
(c) fixed  charges.  May  interest  on  floating  debt  properly 
be  considered  a  fixed  charge? 

(a)  By  funded  debt  is  meant  the  amount  of  bonded  in- 
debtedness incurred  to  discharge  general  liabilities  with. 
Such  debt  bears  a  fixed  rate  of  interest  and  is  redeemable 
generally  at  a  stipulated  date.  Suppose  a  corporation 
has  $100,000  of  outstanding  floating  indebtedness.  It 
may  issue  mortgage  bonds  for  this  amount  and  pay  off  its 
floating  indebtedness  with  the  proceeds.  Liabilities  thus 
discharged  would  become  a  portion  or  all  of  the  corpora- 
tion's funded  debt. 


41 

(b)  Floating  indebtedness  means  the  general  liabilities 
which  have  to  be  discharged  from  time  to  time,  as  dis- 
tinguished from  capital  stock,  bonds,  mortgages,  etc. 

(c)  Fixed  charges  are  those  which  occur  periodically 
without  variation  in  amount.      Instances  of  these  would 
be  interest  on  bonds,  mortgages,  etc. 

Interest  on  floating  debt  could  scarcely  be  called  a  fixed 
charge,  because  it  would  vary  in  amount  and  would  not 
have  to-  be  paid  at  certain  definite  intervals. 

42.  State   cases   in   which   leases   have   a  value   that 
should  appear  in  the  accounts.     How  should  provision  be 
made  in  such  cases  for  the  falling  out  of  such  value  at 
th  expiration  of  the  lease. 

When  a  premium  is  paid  for  the  acquisition  of  a  lease, 
such  sum  might  very  properly  appear  as  an  asset  on  the 
balance  sheet.  Such  cases  would  be,  (1)  where  the  busi- 
ness locality  is  of  so  valuable  a  character  that  the  land- 
lord can  be  reasonably  certain  of  commanding  tenants; 
(2)  premises  licensed. 

Provision  for  the  falling  out  of  such  value  at  the  ex- 
piration of  a  certain  period  should  be  made  by  charging 
annually  to  revenue  such  a  percentage  of  the  total  amount 
as  would  extinguish  the  account  at  the  end  of  the  period. 

43.  In   case  of  discrepancy   in   a  trial   balance,   how 
may  the  accountant  ascertain  which  side  is  erroneous? 

By  testing  either  side.  In  the  case  of  the  debit  side 
test,  the  total  debit  of  last  balance  should  be  taken  and  to 


42 

it  should  be  added  total  of  all  debit  entries  during  month. 
From  this  total  should  be  subtracted  all  credit  entries  af- 
fecting debit  side;  the  remainder  should  be  total  of  debit 
side  of  new  trial  balance. 

44.  How  may  the  gross  profit  or  loss  on  merchandise 
be  ascertained? 

Charge  merchandise  account  with  inventory  at  com- 
mencement of  period,  with  total  purchases  and  returns 
from  debtors.  Credit  it  with  total  sales  and  total  returns 
to  creditors  and  also  with  inventory  at  close  of  period ;  the 
excess  of  credit  side  over  debit  side  will  then  represent 
the  gross  profit. 

45.  Describe  the  profit  and  loss  account.     Show  how 
this  account  is  made  up  and  from  what  accounts  it  is 
made.     What  does  the  balance  of  the  profit  and  loss  ac- 
count represent,  and  how  should  such  balance  be  finally 
treated  ? 

A  Profit  and  Loss  Account  is  an  adjustment  account 
for  the  determination  of  profit  and  loss  for  a  given  period. 
It  is  made  up  by  charging  it  with  nominal  accounts  with 
debit  balances  and  crediting  with  nominal  accounts  with 
credit  balances.  If  the  credit  side  exceeds  the  debit  side, 
the  result  is  a  profit ;  if  the  opposite,  a  loss.  If  a  profit  is 
disclosed,  in  case  of  a  copartnership,  it  should  be  trans- 
ferred to  the  capital  account  of  the  members  of  the  firm, 
but  if  a  corporation,  the  profit  should  be  credited  to  sur- 


43 

plus  account.  (The  following  article,  written  by  the 
author,  has  appeared  in  several  magazines,  and  may  be 
found  interesting)  : 

THE  PROFIT  AND  LOSS  ACCOUNT. 

In  the  paper  on  Theory  of  Accounts  set  at  several  recent 
C.  P.  A.  examinations,  one  of  the  questions  has  been, 
"  Describe  the  Functions  of  the  Profit  and  Loss  Account." 
The  obviously  proper  answer  would  be,  "An  adjustment 
account  opened  at  the  close  of  a  fiscal  period  as  the  re- 
cipient for  the  debit  and  credit  balances  of  the  nominal 
accounts,  so  as  to  enable  one  to  ascertain  by  preponderance 
of  balance  whether  a  profit  or  loss  has  been  made  during 
said  period."  It  is  clear  that  the  account  must  show 
either  a  profit  or  a  loss;  it  cannot  show  both.  And  yet  it 
is  a  matter  of  everyday  occurrence  for  the  auditor  to  find 
such  an  item  as  "  Profit  and  Loss"  as  a  liability  in  the  bal- 
ance sheets  submitted  to  him.  In  two  instances  which 
came  under  the  writer's  notice  recently,  "  Profit  and  Loss  " 
figured  in  the  balance  sheet  as  an  asset!  It  is  contended 
that  the  appearance  of  the  words  profit  and  loss  on  either 
side  of  a  balance  sheet  is  unscientific  and  misleading.  If 
a  profit  has  been  made  (we  are,  of  course,  referring  to 
corporations)  after  allowing  for  bad  debts,  depreciations, 
etc.,  the  balance  should  be  carried  to  surplus  account,  from 
which,  and  from  which  only,  directors  have  authority  to 
recommend  the  declaration  of  dividends.  If  a  dividend 
be  declared,  the  amount  must  be  charged  to  surplus  ac- 


44 

count  and  credited  to  dividend  account,  to  which  are 
charged  the  checks  as  paid  to  stockholders  of  record.  If, 
on  the  other  hand,  a  loss  be  made,  it  should  be  credited  to 
profit  and  loss  account  and  charged  to  surplus  account  (if 
there  be  one  in  existence)  ;  if  not,  it  must  be  charged  to 
deficit  account. 

It  is  strongly  contended  that  the  profit  and  loss  account 
is — as  designed  originally — for  the  sole  purpose  of  deter- 
mining whether  a  profit  or  loss  has  been  made;  and  that 
as  soon  as  this  purpose  is  accomplished,  it  should  be  closed 
at  once,  and  remain  closed  until  the  next  fiscal  period  ter- 
minates. 

Unfortunately,  the  practice  is  very  prevalent  among 
bookkeepers  and  corporation  officials  of  regarding  the  ac- 
count as  a  kind  of  financial  dust  heap;  so  that  any  item 
whose  disposal  under  intelligible  classified  heading  is  not 
readily  ascertainable,  is  thrown  into  "Profit  and  Loss/'  This 
is  to  be  deprecated  greatly  and  resisted  by  the  conscientious 
auditor.  If  he  points  out,  as  it  is  part  of  his  duty  to  point 
out,  first,  that  the  abuse  of  this  account  is  often  made  a 
channel  for  the  covering  up  of  fraudulent  entries;  and, 
second,  that  the  appearance  of  the  words  "  Profit  and  Loss  " 
on  the  balance  sheets  will  generally  mislead  outsiders,  it 
is  possible  that  a  much-needed  reform  may  be  brought 
about;  resulting  in  improved  systems  within  and  in  a 
clearer  presentation  of  facts  to  the  outsider;  both  results 
being  greatly  to  be  desired  in  the  highest  interest  of  com- 
mercial morality. 


45 

46.  Describe  fully  each  of  the  following  accounts,  show- 
ing what  entries  may  be  made  on  each  side  and  what  dis- 
position should  be  made  of  the  balance:  (a)  cash  account, 
(b) .  interest  account,  (c)  merchandise  account,  (d)  sus- 
pense account,  (c)  real  estate  account. 

(a)  The  cash  account  is  charged  with  the  balance  of 
cash  in  bank  and  undeposited  at  the  beginning  of  a  fiscal 
period,  and  with  all  receipts  to  the  end  of  said  period.    It 
is  credited  with  all  payments.     The  balance  indicated  by 
the  excess  of  the  total  debits  over  credit  represents  the 
amount  of  cash  on  hand  at  the  end  of  the  period,  which 
should  appear  in  the  Balance  Sheet. 

(b)  The  Interest  Account  is  charged  with  interest  paid 
on  notes,  mortgages,  etc.,  and  credited  with  interest  re- 
ceived.    If  a  debit  balance  appears  at  the  end  of  a  fiscal 
period,  it  is  charged  to  Profit  and  Loss  account,  if  a  credit 
balance,  it  is  credited  to  the  same  account. 

(c)  The  Merchandise  Account  is  charged  with  the  in- 
ventory on  hand  at  the  commencement  of  a  fiscal  period, 
and  with  all  purchases  and  returns  during  the  period.     It 
is  credited  with  all  sales,  and  with  the  inventory  on  hand 
at  the  end  of  said  period.    If  the  credit  side  is  the  greater, 
the  balance  indicates  the  gross  profit,  which  should  be 
charged  to  the  Merchandise  Account,  and  credited  to  Profit 
and  Loss  Account.      If  the  debit  side  is  the  greater,  the 
balance   is  the  gross  loss,  which   should  be  credited   to 
Merchandise,  and  charged  to  Profit  and  Loss  Account. 

(d)  Suspense  Account  is  charged  with  all  items  whose 


ultimate  realization  in  full  is  doubtful.  Amounts  so 
charged,  if  found  uncollectable,  should  be  credited,  and 
charged  to  Profit  and  Loss  Account.  If  a  partial  payment 
be  made  on  account  of  any  item  so  charged,  and  the  bal- 
ance be  deemed  uncollectable,  the  amount  received  on  ac- 
count should  be  credited  to  Suspense  Account,  and  the 
balance  be  credited  and  charged  to  Profit  and  Loss  Ac- 
count. The  balance  of  the  suspense  account  should  be 
added  to  the  amount  of  accounts  receivable  appearing  in 
the  balance  sheet,  and  adequate  reserve  be  deducted  for 
bad  and  doubtful  debts. 

(e)  Real  Estate  Account  should  be  charged  with  the  cost 
of  property  and  with  any  expenditure  which  enhances 
value.  It  should  be  credited  with  sales  made  (if  any) 
and  with  a  proper  percentage  of  depreciation  periodically. 
The  balance  would  ordinarily  represent  the  cost  value  of 
the  property,  which  should  appear  in  the  balance  sheet  as 
an  asset.  In  connection  with  this  account,  a  Real  Estate 
Income  and  Expenditure  Account  should  be  kept.  This 
should  be  charged  with  any  expenditure  in  the  nature  of 
repairs,  and  credited  with  the  income  arising  from  the 
property.  The  balance  would  show  the  net  revenue  or 
loss  on  the  property  periodically.  As  instances,  the  pay- 
ment of  an  assessment  for  laying  sewers  or  for  asphalting 
the  street  would  properly  be  chargeable  to  Real  Estate  Ac- 
count as  enhancing  value.  Repainting  and  plumbing  re- 
pairs would  be  charged  to  the  income  and  expenditure  as 
being  in  the  nature  of  maintenance. 


47 

47.  Describe  the  following  securities  and  show  the  es- 
sential features  of  each:  (a)  common  stock,  (b)  pre- 
ferred stock,  (c)  income  bonds,  (d)  debenture  bonds,  (e) 
mortgage  bonds. 

(a)  Common  stock  is  a  certificate  of  specified  par  value 
entitling  the  holder  to  vote  at  meetings  of  stockholders  of 
a   corporation,   and  to  participate  in   dividends    (if"" de- 
clared)  after  the  preferred  stockholders  have  been  paid 
the  dividend  stipulated  on  their  certificates  and  after  all 
fixed  charges  have  been  paid.      As  far  as  equity  in  the 
property  of  a  corporation  is  concerned,  the  interest  of 
common  stockholders  is  generally  identical  with  that  of 
the  preferred  stockholders. 

(b)  Preferred  stock  is  a  certificate  of  specified  par  value 
entitling  holder  to  a  fixed  rate  of  dividend  before  any  dis- 
tribution of  profits  in  the  form  of  dividends  is  made 
amongst  the  common  stockholders.     It  is  divided  into  two 
classes:  cumulative  and  non-cumulative.     With  regard  to 
the  cumulative  stock,  if  sufficient  profit  is  not  available  at 
the  close  of  a  fiscal  period  to  pay  the  stipulated  rate  of 
dividend,  the  deficit  unpaid  becomes  a  liability  of  the  cor- 
poration until  paid.     In  the  case  of  non-cumulative  stock, 
if  the  full  dividend  is  earned  it  is  paid,  but  no  deficit  is 
carried  forward  as  a  liability;  it  is  lost  to  the  stockholder. 

(c)  Income  bonds  are  those  issued  against  the  surplus 
income  of  a  corporation  as  security,  after  fixed  charges 
have  been  paid. 


48 

(d)  Debenture  bonds  are  a  class  of  security  superior  to 
income  bonds  and  inferior  to  mortgage  bonds.     The  hold- 
ers are  preferential  creditors  to  whom  bonds  are  issued  in 
much  the  same  way  as  shares  are  issued  to  preferred  stock- 
holders, carrying  a  fixed  rate  of  interest.    They  are  gen- 
erally divided  into  two  classes:     (1)   those  that  are  re- 
deemable at  the  end  of  a  certain  specified  time,  or  upon  a 
specified  notice,  and  (2)  those  that  are  issued  as  perma- 
nent liabilities. 

(e)  Mortgage  bonds  are  securities  issued  covered  by  a 
mortgage  constituting  a  lien  upon  certain  classes  of  fixed 
assets — such  as  buildings,  plant,  real  estate,  &c.     They 
always  carry  a  stated  rate  of  interest,  which  is  a  fixed 
charge  upon  income. 

48.  Describe  the  process  of  taking  a  trial  balance. 
State  the  purposes  of  the  balance  and  show  its  relations  to 
the  balance  sheet. 

A  trial  balance  is  taken  by  adding  up  the  postings  on  the 
debit  and  credit  side  of  every  account  in  the  ledger  singly, 
and  by  placing  the  balance  of  each  account  on  the  debit  or 
credit  side  of  a  trial  balance  sheet.  If  the  postings  are 
correct  and  the  balances  accurately  taken  from  the  ledger, 
the  totals  of  both  sides  of  the  trial  balance  will  agree.  The 
purpose  of  the  trial  balance  is  to  demonstrate  the  mathe- 
matical accuracy  of  the  posting. 

The  relation  of  the  trial  balance  to  the  balance  sheet  is 
basic;  for  when  the  nominal  accounts  are  closed  out  into 


49 

the  profit  and  loss  account,  and  the  inventory  brought  into 
account,  the  trial  balance  is  converted  into  a  balance  sheet 
in  extended  form. 

49.  Give  a  rule  averaging  the  maturity  of  the  balance 
of  an  account  containing  items  of  various  dates  on  each 
side. 

First  find  the  due  date  of  each  item  and  assume  the  ear- 
liest due  date,  as  the  day  of  settlement  of  all  the  items  on 
both  sides  of  the  account.  Multiply  each  item  by  the 
number  of  days  intervening  between  the  assumed  date  of 
settlement  and  due  date  of  the  item.  Find  the  sum  total 
of  the  products  on  each  side  of  the  account.  Divide  the 
difference  between  the  sums  of  the  debit  and  credit  prod- 
ucts by  the  balance  of  the  account.  The  quotient  will  be 
the  number  of  days  intervening  between  the  asumed  date 
and  true  date  of  settlement,  counting  forward  the  number 
of  days  when  the  account  balances  are  on  the  same  side 
and  counting  backwards  when  on  opposite  sides. 

50.  State  in  the  form  of  journal  entries  the  following 
transactions :  (a)  a  note  of  a  customer  returned  with  pro- 
test charges  from  the  bank  where  it  had  been  left  for  col- 
lection, (b)  the  setting  aside  for  wear  and  tear  of  a  portion 
of  the  value  of  machinery,  (c)  the  adjustment  of  interest 
accrued  but  not  yet  payable  on  a  mortgage,   (d)  accom- 
modation paper  indorsed  by  the  firm  when  coupon  bonds 
are  received  as  security. 


50 

(a)  John  Brown,  Dr.,  $51.25. 

To  Bills  Receivable    $50.00 

To  Expense  Account   1.25 

note  returned  by  bank  with  protest  charges. 

(b)  Profit  and  Loss  account,  Dr.,  $500. 

To  Plant  and  Machinery   $500 

being  5  per  cent  depreciation  written  off  $10,000  for  wear 
and  tear. 

(c)  Interest  account,  Dr.,  $250.00. 

To  accrued  interest  account $250.00 

being  accrued  interest  on  mortgage  at  time  of  closing  books, 
but  not  yet  payable. 

(d)  Collateral  security  account,  Dr. $10,000.00 

To  Contingent  liability  account 10,000.00 

being  $10,000.00  coupon  bond  C.  M.  &  St.  P.  Ry.  Co.  re- 
ceived as  collateral  security  for  accommodation  note  in- 
dorsed by  us,  this  day,  in  favor  of  A,  B  &  C,  $15,000.00 
due  September  14  ult.,  1898. 

51.  In  case  of  bonds  purchased  at  a  premium  or  at  a 
discount,  to  be  held  till  maturity,  state  how  the  price 
should  be  disposed  of  on  the  books  at  purchase,  at  maturity 
and  at  any  intervening  time. 

In  the  case  of  bonds  purchased  at  a  premium: 

(a)  When  purchased,  the  par  value  should  be  charged  to 

investment  account,  and  the  premium  to  bond  premium 

account. 

(&)  At  any  intervening  time  the  bond  premium  account 

would  be  credited  with  such  a  proportion  of  the  interest 


51 

received  as  would  wipe  out  the  account  at  the  maturity  of 
the  bonds.  On  the  balance  sheet  the  balance  of  premium 
added  to  the  investment  would  ordinarily  represent  the 
value  of  the  investment. 

(c)  At  maturity  the  premium  would  be  wiped  out,  and 
the  bond  would  be  redeemed  at  par.  The  investment  ac- 
count would  therefore  be  credited  and  cash  debited  with  the 
par  value  of  the  bonds. 

In  the  case  of  bonds  purchased  at  a  discount,  the  in- 
vestment account  would  be  charged  with  the  cost  of  the 
bonds,  and  debited  annually,  and  interest  account  credited 
with  such  an  amount  as  would  raise  the  cost  to  par  value 
by  the  time  the  bonds  were  redeemable. 

52.  Formulate,  in  an  imaginary  case,  the  journal  en- 
try or  entries  for  the  conversion  of  a  partnership  into  a 
joint  stock  company  with  the  same  resources  and  liabilities. 

Balance  sheet  of  Messrs.  Nogood,  Allbad  &  Allthere. 
ASSETS.  LIABILITIES. 

Cash $10,465.00     Bills  Payable    .  .$17,483.32 

Mdse 29,700.00     Accounts   15,482.30 

Plant,  etc 20,000.00      Mr.  Nogood,  cap- 
Accounts  Rec'ble,  22,800.62         ital   25,000.00 

Mr.  Allbad,  capi- 
tal       15,000.00 

Mr.  Allthere,  cap- 
ital    10,000.00 

$82,965.62  $82,965.62 


The  copartnership  is  dissolved,  and  a  corporation  is 
formed  with  a  capitalization  of  $100,000.00  to  take  over 
the  business  as  it  stands — the  whole  of  the  stock  to  be 
divided  amongst  the  partners  in  proportion  to  their  in- 
vestment. 

Journal  Entries. 
Good  Will,  Dr.,  $50,000.00. 

To  Mr.  Nbgood.. $25,000.00 
To  Mr.  Allbad  .  .  15,000.00 
To  Mr.  Allthere..  10,000.00 

being  excess  value  of  stock  paid  them  over  amount  to  their 
credit  as  capital. 

Sundries,  Dr.,  to  Capital  Stock,  $100,000.00. 

Mr.  Nogood $50,000.00 

Mr.  Allbad 30,000.00 

Mr.  Allthere   ....   20,000.00 

being  transfer  to  them  of  Capital  Stock  for  the  full  settle- 
ment of  their  individual  Capital  Accounts. 

53.  Describe  a  voucher  record  for  the  expenditures 
of  a  corporation. 

The  voucher  record  is  designed  to  facilitate  the  analysis 
of  expenditures  by  analysis  columns;  to  minimize  the 
labor  of  posting,  and  to  obviate  the  necessity  of  keeping 
individual  accounts  with  creditors  in  the  ledger.  After 
bills  have  been  checked  and  passed  for  payment,  they  are 


53 

attached  to  a  voucher  folder,  on  the  back  of  which  is  en- 
tered the  detailed  analysis  of  the  bill  under  headings  with 
the  same  designations  as  those  at  the  heads  of  the  columns 
in  the  voucher  record  book.  The  folder  with  bills  at- 
tached is  then  passed  to  the  vouchers  record  clerk  for  entry 
in  the  proper  columns  of  the  record  book.  At  the  end  of  the 
month,  the  columns  of  the  book  are  footed  and  charged  to 
the  various  nominal  accounts  in  the  ledger,  while  the  totals 
of  all  the  bills,  as  shown  in  the  "  totals"  column  is  credited 
to  "  Vouchers  Payable  "  account  in  the  ledger.  Checks  are 
made  out  and  marked  by  number  to  correspond  with  the 
vouchers,  and  all  items  entered  in  the  "  Vouchers  Pay- 
able "  column  in  the  cash  book.  The  footing  of  this  col- 
umn at  the  end  of  the  month  is  debited  to  the  "  Vouchers 
Payable "  account  in  the  ledger,  the  balance  of  which 
should  show  the  amount  of  "  accounts  payable." 

54.  What  is  meant  by  good  will?  What  kind  of  prop- 
erty is  good  will  ?  May  the  good  will  of  a  partnership  be 
sold? 

By  good  will  is  meant  ordinarily  the  capitalized  value 
of  the  average  net  earnings  of  a  business  for  a  term  of  years 
— usually  varying  from  three  to  ten  years. 

It  is  based  upon  the  probability  that  old  customers  will 
resort  to  the  same  place.  Its  existence  is  to  be  found  in 
most  corporation  balance  sheets  under  some  "  fancy  "  title 
or  other.  Its  value  depends  on — 

(a)  the  place; 

(b)  the  name; 


54 

(c)  the  chance  that  no  one  connected  with  the  old  firm 
will  step  in  to  compete.  The  question  of  its  value  may 
arise : 

(a)  upon  the  dissolution  of  a  firm; 

(b)  upon  the  sale  of  the  business.      Good  will  is  per- 
sonal property.     The  good  will  of  a  partnership  may  be 
sold  just  as  well  as  any  other  species  of  property. 

55.  What  names  are  given  to  accounts  that  represent 
the  excess  of  assets  over  liabilities?     Differentiate  these 
names  in  their  application  to  various  kinds  of  business. 

Capital,  Surplus,  Reserve,  Undivided  profits.  Excess  of 
assets  over  liabilities  is  capital  in  the  case  of  an  individual 
or  partnership.  In  the  case  of  monetary  corporations,  it  is 
called  "  Surplus  and  reserve."  By  transportation  com- 
panies, it  is  called  "  undivided  profits,"  and  sometimes, 
though  very  improperly,  "  Profit  and  Loss." 

56.  AYhat  is  the  proper  course  of  procedure  in  taking 
charge  of  the  bookkeeping  of  a  firm  that  has  either  no 
books  of  account  or  very  imperfect  ones? 

The  proper  course  would  be,  first,  to  take  a  careful  in- 
ventory of  merchandise,  plant  and  machinery,  furniture 
and  fixtures  and  other  assets,  and  if  sufficient  data  are  un- 
obtainable to  determine  their  approximate  value,  to  have 
them  properly  appraised.  Next,  bills,  letters  and  memo- 
randa should  be  investigated  so  as  to  find  out  what  are 
the  other  assets  and  liabilities,  and  arrive  at  the  capital 
of  the  concern.  Statements  should  be  procured  from 


55 

creditors,  and  sent  to  debtors,  and  confirmation  of  their 
accuracy  requested.  The  bank  pass  book  should  be  written 
up  to  date  and  balanced,  and  the  cash  in  hand  counted.  On 
the  ascertained  basis  of  affairs,  a  proper  set  of  books  should 
be  opened.  The  personal  assistance  of  the  members  of  the 
firm  would  probably  be  indispensable  in  arriving  at  satis- 
factory conclusions. 

57.  Describe  fully  a  system  by  which  occasional  small 
sales  made  on  credit  to  persons  not  regular  customers  may 
be  recorded  without  opening  a  separate  account  with  each 
purchaser. 

A  very  simple  method  is  to  have  the  opening  pages  of 
the  ledger  alphabetically  indexed,  giving  a  few  folios  to 
each  letter.  Sales,  as  made,  could  be  posted  in  alphabeti- 
cal order,  and  the  settlement  of  same  would  appear  oppo- 
site. Another  method  would  be  to  have  a  "  Petty  Sales 
Ledger"  alphabetically  indexed,  the  balance  of  which 
might  easily  be  shown  in  the  General  Ledger  by  means  of 
a  controlling  account. 

58.  Describe  the  most  complicated  form  of  cash  book 
with  which  you  are   acquainted,   showing  its   functions, 
the  sources  from  which  its  materials  are  derived  and  where 
its  results  are  carried. 

Cash  books  differ  from  one  another  principally  in  the 
extent  to  which  the  columnar  system  is  made  use  of.  As 
the  use  of  this  system  is  to  lessen  the  labor  of  posting  and 
to  facilitate  the  analysis  of  receipts  and  expenditure,  it 


56 

might  be  reasonably  assumed  that  complication  of  form  is 
in  inverse  ratio  to  the  number  of  columns  used.  This  be- 
ing so,  the  most  complicated  form  of  cash  book  might 
fairly  be  said  to  be  that  which  contains  one  column  for 
receipts,  and  one  for  expenditures,  thus  necessitating  the 
posting  of  every  individual  cash  transaction. 

59.  Describe  fully  the  method  of  keeping  a  bills  re- 
ceivable account,  and  state  the  connection  of  the  account 
with  the  bill  book. 

The  Bills  Receivable  account  in  the  ledger  should  be 
charged  monthly  with  the  total  amount  of  notes  received 
from  customers,  and  be  credited  with  cash  paid  in  settle- 
ment of  same,  or  with  cash  received  for  those  discounted. 
When  a  note  is  received  in  payment  of  an  account,  it 
should  be  entered  in  the  bill  book  and  posted  to  the  credit 
of  the  person  from  whom  received  at  once.  The  double 
entry  is  completed  by  charging  the  total  to  the  ledger  ac- 
count, as  before  stated.  If  this  method  be  pursued,  the 
necessity  of  journalizing  is  obviated. 

While  this  system  is  the  shortest  and  the  one  generally 
employed,  the  ledger  account  does  not  furnish  a  complete 
detailed  schedule,  necessitating  constant  reference  to  the 
bill  book.  This  could  be  avoided  by  posting  each  item 
singly  to  bills  receivable  account,  marking  in  also  the  due 
date. 

60.  As  the  bookkeeper  of  a  firm  that  had  no  articles 
of  copartnership,  what  would  be  your  duty  on  learning  of 
the  death  of  a  partner? 


57 

The  proper  course  for  the  bookkeeper  to  pursue  under 
the  circumstances  would  be  to  suggest  the  taking  of  an 
inventory,  closing  the  book,  adjusting  the  capital  account, 
and  making  up  a  complete  statement  of  affairs  at  the  time 
of  the  decease  of  the  partner.  He  should  also  recom- 
mend the  opening  of  another  set  of  books  to  contain  de- 
tails of  the  subsequent  realization  of  assets,  and  liquida- 
tion of  liabilities  of  the  firm. 

61.  Define  debit,  credit,  debtor,  creditor.  State  the 
general  law  growing  out  of  the  relationship  of  debtor  and 
creditor  that  governs  double-entry  bookkeeping.  What  is 
the  result  of  a  debit  entry?  of  a  credit  entry? 

Debit — he  owes;  Latin,  debeo. 

Credit — he  believes  or  trusts;  Latin,  credo. 

Debtor — one  who  owes  something. 

Creditor — one  who  trusts  another;  one  to  whom  some- 
thing is  owing. 

The  general  law  growing  out  of  the  relationship  of 
debtor  and  creditor  maintained  in  double-entry  bookkeep- 
ing is  that  if  one  person  or  account  is  charged,  another 
person  or  account  is  credited  with  a  like  amount.  By  this 
means  the  equilibrium  of  the  ledger  is  maintained.  The 
result  of  a  debit  entry  is  to  charge  some  person  or  account 
with  a  certain  amount.  It  is  the  record  of  the  creation  of 
an  asset  either  by  purchase  or  transfer,  or  of  an  expense. 
The  result  of  a  credit  entry  is  the  creation  of  a  liability, 
either  by  purchase  or  transfer,  or  of  an  item  of  profit. 


58 

62.  Mention  the  different  classes  into  which  accounts 
are  usually  divided.  Give  the  names  of  the  principal  ac- 
counts of  each  class.  Which  class  or  classes  of  accounts 
close  into  loss  and  gain  account?  Mention  the  principal 
accounts  common  to  mercantile  bookkeeping  and  state  the 
purposes  of  each. 

Accounts  are  divided  into  the  following  classes: 
Personal.  Impersonal. 


Nominal.  Real. 

Personal  accounts  are  those  kept  with  persons,  debtors 
and  creditors;  impersonal  accounts  are  all  others. 

The  principal  nominal  accounts  are :  Discount,  Interest, 
Commission,  Expense,  Salaries,  Wages,  etc. 

The  principal  real  accounts  are:  Cash,  Merchandise 
(Inventory),  Plant  and  Machinery,  Buildings,  etc. 

The  nominal  accounts  close  out  periodically  into  Profit 
and  Loss  Account. 

The  principal  accounts  common  to  mercantile  bookkeep- 
ing, and  the  purpose  of  each,  are  as  follows : 

(a)  Merchandise   or   Trading   Account — to   determine 
the  amount  of  gross  profit  earned. 

(b)  Cash  Account — to  record  amount  on  hand  at  the 
beginning  of  a  fiscal  period,  the  monthly  receipts  and 
expenditures,  and  the  balance  left  at  the  end  of  the  period. 


59 

(c)  Discount  Account — to  record  the  amounts  allowed 
to  debtors  and  received  from  creditors  in  settlement  of 
accounts. 

(d)  Interest  Account — to  show  the  amount  of  interest 
received  and  paid  in  the  course  of  a  fiscal  period. 

(e)  Expense  Account  (subdivided  into  as  many  classes 
as  necessary) — to  show  the  general  expenses  of  a  business. 

(/)   Salary  Account — to  contain  the  amounts  paid  out 
under  this  heading. 

(g)  Wages  Account — to  show  the  total  amount  paid  for 
labor,  etc. 

(h)   Plant  and  Machinery  Account — to  record  cost  of 
plant,  and  to  show  amount  written  off  for  depreciation. 

(t)  Furniture  and  Fixtures  Account — showing  cost  of 
these  items. 

(/)  Bills  Receivable  Account — to  contain  amount  due 
by  debtors  on  notes. 

(k)  Bills  Payable  Account — to  show  amount  and  par- 
ticulars of  notes  given  to  creditors. 

(1)  Accounts  Receivable  and  Payable — showing  full  par- 
ticulars of  amounts  due  by  debtors  and  to  creditors. 

(ra)  Capital  Account — to  show  amounts  invested  and 
withdrawn  by  principals,  and  also  amount  of  capital  accre- 
tion consequent  on  transfer  to  it  of  profit  from  time  to 
time,  as  shown  by  the  Profit  and  Loss  Account. 

63.  Define  assets,  liabilities.  What  are  fixed  assets, 
quick  assets?  In  making  up  a  general  statement  of  assets 
and  liabilities,  what  groups  of  accounts  constitute  assets 


60 

and  what  constitute  liabilities?  State  how  to  treat,  on 
closing  the  books,  assets  and  liabilities  accrued  but  not 
actually  due  (such  as  interest  receivable  and  payable, 
taxes,  insurance,  commissions,  salaries,  rents). 

Assets — things  owned. 

Liabilities — things  owed. 

Fixed  Assets — those  not  available  as  working  capital, 
i.  e.,  which  cannot  be  converted  into  cash  readily. 

Quick  Assets — another  name  for  cash  assets,  i.  e.,  cash  or 
what  can  be  readily  converted  thereinto. 

Personal  and  real  accounts  constitute  assets;  personal 
and  capital  accounts  constitute  liabilities. 

For  assets  accrued  but  not  yet  due  an  account  should  be 
opened  (take  interest  for  example)  under  the  heading  of 
Accrued  Interest  Eeceivable,  and  the  amount  accrued 
should  be  charged  through  the  Journal  to  this  account, 
and  credited  to  Profit  and  Loss  Account.  On  the  balance 
sheet  the  item  would  appear  as  "  Interest  Accrued " 
amongst  the  assets.  For  liabilities  accrued  but  not  yet  due, 
Profit  and  Loss  Account  should  be  debited,  and  an  "Ac- 
crued" account  credited  under  proper  descriptive  title. 
The  item  would  of  course  appear  on  the  balance  sheet 
amongst  the  liabilities. 

64.  Describe  the  different  methods  of  determining  the 
loss  or  gain  of  a  business.  How  is  the  loss  or  gain  of  a 
business  determined  from  books  kept  by  single  entry? 
State  the  usual  mode  of  procedure  when  the  books  are  kept 
by  double  entry. 


61 

There  are  two  methods  of  determining  the  loss  or  gain 
of  a  business : 

(a)  The  resource  and  liability  method,  which  consists 
in  comparing  the  total  assets  with  the  total  liabilities ;  the 
excess  of  the  former  over  the  latter  constituting  the  net 
profit. 

(b)  The  profit  and  loss  method,  which  consists  in  com- 
paring the  total  of  the  revenue  accounts,  with  credit  bal- 
ances, with  that  of  those  with  debit  balances  in  the  profit 
and  loss  account.     The  excess  of  the  former  over  the  latter 
is  the  amount  of  net  profit.     The  accuracy  of  this  is  con- 
firmed by  the  balance  sheet,  where  the  same  result  is  shown 
in  the  increased  excess  of  assets  over  liabilities. 

In  single-entry  bookkeeping  the  loss  or  gain  is  deter- 
mined by  the  resource  and  liability  method,  as  the  nominal 
accounts  recording  revenue  income  and  expenditure  are  not 
kept. 

When  books  are  kept  by  double-entry  the  loss  or  gain  is 
determined  by  the  Profit  and  Loss  Account  method.  The 
procedure  is  as  follows :  the  gross  profit  having  been  deter- 
mined by  the  Merchandise  or  Trading  Account,  the  amount 
is  transferred  to  the  credit  of  the  Profit  and  Loss  Account. 

All  nominal  accounts  with  debit  balances  are  charged, 
and  all  nominal  accounts  with  credit  balances  are  credited 
to  the  Profit  and  Loss  Account.  Depreciations  and  re- 
serves having  been  also  charged,  the  excess  of  the  credit 
over  the  debit  side  is  the  amount  of  the  net  profit. 


62 

65.  State  the  purpose  of  (a)  consignment  account,  (&) 
shipment  or  adventure  account,  (c)  adventure  joint  ac- 
count, (d)  merchandise  company  account.  Describe  how 
each  should  be  opened,  conducted  and  closed. 

The  purpose  of 

(a)  A  consignment  account  is  to  show  the  profit  or  loss 
made  on  sales  effected  through  a  second  party,  called  the 
consignee. 

(&)  A  shipment  or  adventure  account  is  to  show  the 
profit  or  loss  made  on  a  particular  speculative  shipment  of 
goods  to  another  place  for  sale. 

(c)  An  adventure  joint  account  is  to  record  particulars 
and  show  the  ultimate  profit  or  loss  on  a  trading  venture, 
generally  of  a  temporary  character,  in  which  two  or  more 
persons  join,  who  agree  to  share  profits  or  losses  in  certain 
proportions. 

(d)  A  merchandise  company  account  is  to  record  the 
transactions  and  profit  or  loss  of  a  company  formed  to 
conduct  adventures  and  the  shipments  of  merchandise. 

(a)  Goods  consigned  are  credited  by  the  consignor  to 
Merchandise  Account,  and  charged  to  Consignment  Ac- 
count under  the  name  of  consignee.  The  consignee  receives 
the  goods  and  opens  a  consignment  account  with  the  con- 
signor. He  charges  it  with  expenses  and  commission,  and 
credits  it  with  sales.  When  the  transaction  is  completed 
he  renders  an  account  sales  and  remits  the  balance  due  the 
consignor. 

(&)    A  shipment  or  adventure  account  is  opened  by 


63 

crediting  merchandise,  and  charging  the  account  with  the 
value  of  the  goods  shipped.  It  is  further  charged  with  all 
expenses  of  shipment  and  sales,  and  credited  with  the 
amounts  sold.  A  credit  balance  would  indicate  the  amount 
of  net  profit  on  the  adventure,  which  should  be  credited  to 
Profit  and  Loss  Account. 

(c)  An  adventure  joint  account  should  be  conducted  in 
precisely  the  same  manner — the  profit  being  distributed  as 
agreed  on  amongst  the  parties  to  the  venture. 

(d)  The  Merchandise  Company  Account  is  kept  in  the 
same  manner,  the  result  of  each  venture  being  credited  to 
Profit  and  Loss  Account  for  ultimate  division  amongst  the 
stockholders. 

66.  Describe  the  entries  necessary  to  open  a  set  of 
double-entry  books.  In  what  respect  is  the  double-entry 
system  preferable  to  the  single-entry  system? 

Double-entry  books  are  opened  by  first  preparing  com- 
plete schedules  of  assets  and  liabilities,  the  excess  of  the 
former  over  the  latter  being  the  capital.  One  Journal 
entry  only  is  necessarj',  viz. : 

Sundries,  Dr.  (all  assets). 

To  Sundries  (all  liabilities,  including  capital). 

Such  nominal  accounts  should  also  be  opened  in  the 
ledger  as  may  be  found  necessary  to  record  income  and 
expenditure,  and  the  books  are  "  opened." 

The  double-entry  system  is  preferable  to  the  single-entry 
system  because : 


64 

(a)  by  means  of  the  trial  balance  the  mathematical 
accuracy  of  the  posting  is  demonstrable. 

(5)  by  means  of  the  merchandise  account  the  gross  profit 
is  determinable. 

(c)  the  accuracy  of  the  profit  or  loss  shown  by  the  profit 
and  loss  account  is  confirmed  by  the  balance  sheet. 

(d)  all  receipts  and  expenditure,  both  capital  and  rev- 
enue, MUST  appear  on  the  ledger; 

(e)  comparative  statistics  for  fiscal  periods  of  any  class 
of  receipts  and  expenditure  are  available ; 

(/)  profit  or  loss  may  be  shown  on  any  department,  on 
any  commodity  sold,  or  on  any  article  manufactured ; 

(g)  the  facility  offered  for  a  rapid  and  exhaustive  audit 
is  to  that  extent  a  deterrent  from  fraudulent  entries ; 

(h)  lastly,  not  only  is  the  amount  of  profit  and  loss 
shown  but  also  the  direct  sources  of  same. 

67.  Describe  the  process  of  changing  single  entry 
books  to  double  entry.  What  additional  accounts  are  re- 
quired? Is  it  necessary  to  disturb  any  accounts  already 
opened  in  the  ledger,  or  to  keep  such  accounts  differently 
after  the  change? 

Single  entry  books  may  be  readily  converted  into  double- 
entry  books,  in  the  following  manner:  First  rule  off  all 
expense  accounts  and  make  up  a  complete  schedule  of 
assets  and  liabilities  from  all  sources — whether  on  the 
•  books  or  not.  Determine  from  the  excess  of  the  assets  over 
the  liabilities  the  amount  of  the  net  capital,  and  then  make 
the  following  Journal  entry : 


65 

Sundries,  Dr.  (enumerate  all  assets). 

To  Sundries  (enumerate  all  liabilities,  including  capi- 
tal). 

Then  open  accounts,  and  post,  leaving  untouched  those 
items  already  open  on  the  ledger.  A  trial  balance  should 
be  taken  off  at  once  to  prove  the  correctness  of  the  opening 
entries.  The  additional  accounts  required  would  be  such 
as  might  be  necessary  from  appearing  amongst  the  assets, 
and  such  nominal  accounts  as  might  be  required  to  show 
in  detail,  revenue  expenditure  and  income. 

It  is  not  necessary  to  disturb  any  accounts  in  the  ledger 
(except  the  ruling  off  of  expense  accounts  as  above  stated), 
nor  to  keep  them  any  differently  after  the  change. 

68.  Describe  in  detail  the  manner  of  closing  a  double 
entry  ledger.  How  should  the  results  of  the  business  be 
stated?  Why  is  property  unsold  credited  to  the  account 
to  which  it  belongs  before  closing  ?  How  should  worthless 
and  doubtful  debts  be  treated  in  closing? 

First  determine  the  amount  of  gross  profit  by  crediting 
Merchandise  Account  with  the  inventory  at  the  end  of  the 
period,  carry  amount  of  gross  profit  to  the  credit  of  Profit 
and  Loss  Account,  and  bring  over  the  inventory  as  a  debit 
balance  in  the  Merchandise  Account.  Next  close  out  all 
nominal  accounts  into  the  Profit  and  Loss  Account.  Charge 
off  a  proper  percentage  for  depreciation,  reserve  for  bad 
debts,  etc.,  and  the  excess  of  the  credit  side  of  Profit  and 
Loss  Account  over  the  debit  will  be  the  net  profit. 


66 

The  results  of  the  business  should  be  stated  in  the  Profit 
and  Loss  Account,  the  confirmation  of  their  accuracy  ap- 
pearing in  the  balance  sheet,  under  the  head  of  increase 
or  decrease  of  capital. 

Property  is  credited  to  the  account  to  which  it  belongs 
before  closing,  because  the  object  in  view  is  to  show  the 
actual  excess  of  sales  over  purchase  price  of  things  actually 
sold.  Theoretically  it  would  appear  more  correct  to  deduct 
the  amount  from  the  debit  side  of  the  account.  In  closing, 
worthless  debts  should  be  charged  to  profit  and  loss  ac- 
count, while  doubtful  debts  should  be  carried  into  a  sus- 
pense account  or  doubtful  debts  ledger. 

69.  State  the  entries  necessary  to  open  a  set  of  cor- 
poration books  so  that  the  assets  may  appear  properly  on 
the  ledger.  What  books  are  necessary  in  corporation  ac- 
counting that  are  not  necessary  in  mercantile  accounting? 
What  does  the  capital  account  show?  Define  preferred 
stock,  common  stock,  watered  stock. 

In  opening  a  set  of  books  for  a  corporation  a  complete 
set  of  schedules  of  assets  and  liabilities  should  first  be 
prepared  and  the  amount  of  the  authorized  capital  stock 
ascertained  from  the  articles  of  incorporation,  a  copy  of 
which  should  be  found  in  the  Minute  book.  The  following 
Journal  entry  should  then  be  made : 

Sundry  Assets,  Dr. 

To  Sundry  Liabilities  (include  capital  stock). 

If  the  assets  do  not  equal  the  liabilities  some  fictitious 
asset  must  be  entered  so  as  to  make  the  ledger  balance. 


67 

Good  Will,  Rights  and  Franchises,  Organization  Account, 
are  a  few  of  the  "  fancy  "  titles  used.  In  the  very  rare  cases 
where  the  assets  EXCEED  the  liabilities  the  balance  should  be 
credited  to  Reserve  Account. 

If  any  portion  of  the  capital  stock  is  offered  for  subscrip- 
tion the  amount  should  be  charged  to  Subscription  Ac- 
count and  credited  to  Capital  Account.  Stock  unissued 
should  appear  on  the  debit  side  of  the  ledger  under  the 
head  of  Treasury  Stock.  Such  nominal  accounts  should  be 
opened  as  might  be  found  necessary  to  set  forth  the  trans- 
actions clearly.  The  following  additional  books  are  neces- 
sary for  corporations :  Minute  Book,  Stock  or  Shares  Led- 
ger, Transfer  Book,  Stock  Certificate  Book.  The  Capital 
Account  should  show  the  authorized  amount  of  capital 
stock. 

Preferred  Stock  is  a  share  certificate  entitling  the  holder 
to  a  fixed  rate  of  dividend  before  any  be  declared  on  the 
Common  Stock. 

Common  Stock  is  a  share  certificate  entitling  the  holder 
to  share  in  the  profit  earned  in  the  form  of  dividends  if 
declared.  The  holder  is  also  entitled  to  vote  at  stock- 
holders' meetings. 

Watered  Stock  is  capital  stock  issued  for  which  no  value 
has  been  received. 

70.  State  the  object  of  each  of  the  following:  Plant 
account,  capital  account,  surplus  or  reverse^  fund  account, 
redemption  fund  account,  depreciation  account. 


fo& 


68 

Plant  Account  should  be  charged  with  the  cost  of  plant 
and  machinery,  and  with  any  expenditures  which  may  en- 
hance its  value.  It  should  be  periodically  credited  with  a 
proper  percentage  for  depreciation  consequent  on  wear  and 
tear. 

Capital  Account  of  a  firm  should  be  credited  with 
amount  invested,  and  with  profit  earned,  as  shown  by  the 
profit  and  loss  account.  It  should  be  charged  with  cash 
withdrawn.  Capital  Account  of  a  corporation  should  show 
the  total  amount  of  its  authorized  capital  stock.  Surplus 
Account  should  be  credited  with  profits  as  shown  by  the 
Profit  and  Loss  Account.  It  should  show  at  any  time  the 
amount  of  undistributed  profits. 

Reserve  Fund  Account  should  be  credited  periodically 
with  such  a  portion  of  the  profits  as  may  be  thought  desir- 
able to  meet  certain  expenditures  or  losses.  Thus  there 
may  be  reserve  for  bad  debts,  reserve  for  depreciation,  etc. 
The  purpose  of  the  reserve  should  always  be  specified,  and 
it  should  only  be  used  for  such  purpose. 

Redemption  Fund  Account  is  the  title  applied  to  an  ac- 
count whose  object  is  to  record  the  amount  of  money  set 
aside  periodically  to  redeem  some  given  obligation  (gener- 
ally bonds)  at  some  future  time.  The  Redemption  Fund 
Account  should  be  represented  by  a  credit  balance,  while 
the  fund  itself,  consisting  of  cash  or  investments,  would  of 
course  be  a  debit  item. 

Depreciation   Account   should   show   at   any   time   the 


69 

amount  set  aside  out  of  earnings  to  replace  plant,  machin- 
ery, etc.,  when  worn  out. 

71.  What  should  be  done  regarding  the  books  on  the 
admission  of  a  new  partner  into  a  firm?      What  entry 
should  be  made  (a)  when  cash  is  invested  for  a  certain 
share  in  the  gains  and  losses  (b)  when  a  specified  amount 
is  paid  to  the  old  members  for  a  certain  share  in  the  gains 
and  losses? 

An  inventory  should  be  taken,  the  books  closed,  and  capi- 
tal accounts  adjusted. 

(a)  The  amount  invested  should  be  charged  to  Cash 
Account,  and  credited  to  the  new  partner. 

(b)  The  amount  should  be  divided  between  the  old  part- 
ners pro  rata.      It  need  not  necessarily  be  placed  in  the 
business.      The  old  partners  should  be  charged,  and  the 
new  partner  be  credited  with  such  an  amount  as  may  be 
necessary  to  give  expression  to  the  agreement. 

72.  What  is  understood  by  cost  or  factory  bookkeep- 
ing?    What  is  shown  by  the  cost  books?     What  are  the 
principal  items  entering  into  the  cost  of  manufactured 
products  ? 

By  cost  or  factory  bookkeeping  is  meant  the  keeping  a 
detailed  record  of  the  cost  of  different  articles  manufac- 
tured. The  debit  side  should  show  their  actual  cost.  The 
cost  books  should  show  prime  cost,  cost  and  quantities 
manufactured. 


70 

The  principal  items  entering  into  cost  are : 

Material  (including  freight);  Labor;  Direct  and  de- 
partmental expense  of  production;  Superintendent's 
wages,  etc.;  Depreciation  of  buildings  and  plant; 
Light,  heat,  rent,  insurance  and  taxes,  depreciation, 
salaries,  etc. 

73.  What  is  meant  by  the  voucher  system  of  bookkeep- 
ing? Describe  the  voucher  record  book. 

The  voucher  system  of  bookkeeping  is  designed  to  ob- 
viate the  necessity  of  keeping  individual  accounts  with 
creditors,  while  affording  complete  detailed  analysis  of  ex- 
penditure under  classified  headings.  As  bills  are  approved 
for  payment  they  are  placed  in  a  voucher  folder,  and  the 
analysis  of  expenditure  is  entered  in  columns  ruled  at  the 
back.  Each  folder  is  numbered  and  passed  on  for  entry 
in  the  voucher  record  book. 

The  voucher  record  book  contains  columns  for  the  num- 
bers of  the  vouchers,  names  of  creditors,  total  amount  of 
bills,  and  a  separate  column  for  each  item  of  expenditure. 
At  the  end  of  the  month  the  totals  of  the  first  column  is 
posted  to  the  credit  of  an  account  entitled  "  Vouchers  Pay- 
able "  in  the  general  ledger.  The  total  of  every  other 
column  is  posted  to  the  debit  of  the  nominal  account  whose 
heading  it  bears,  thus  completing  the  double  entry.  A  sepa- 
rate column  is  kept  in  the  cash  book  for  vouchers  payable 
paid,  the  total  of  which  is  monthly  posted  to  the  debit  of 
that  account  in  the  ledger. 


71 

The  balance  of  the  ledger  account  would  show  monthly 
the  total  amount  of  accounts  payable  unpaid. 

74.  How  should  executors'  and  administrators'  ac- 
counts be  stated  for  the  purpose  of  filing  in  court?  What 
does  the  sjuLmnaary^of^acjcojonts  usually  include?  What 
are  assets  of  the  estate?  When  are  dividends,  interest  and 
rents  to  be  treated  as  principal?  Define  an  intermediate 
account.  What  is  a  final  account?  With  what  does  the 
executor  charge  himself  ?  For  what  does  he  take  credit  ? 

They  should  be  filed  in  such  a  way  as  to  show  under  the 
head  of 

(1)  Principal — Amount  of  inventory  at  start  and  par- 
ticulars of  income  and  expenditure  under  this  head  in 
schedule  form,  the  balance  being  added  to  the  inventory, 
showing  "  balance  "  of  principal. 

(2)  Income — Particulars  of  all  receipts  and  expendi- 
ture coming  under  this  head  in  schedule  forms.     The  sum- 
mary of  accounts  shows  totals  of  principal  and  income, 
receipts  and  expenditure  and  the  balance  available  for  dis- 
tribution. 

Assets  of  the  estate  are  all  personal  property,  i.e.,  gen- 
erally speaking,  everything  except  real  estate. 

Dividends,  interest  and  rent  are  to  be  treated  as  principal 
when  they  were  accrued  at  the  time  of  the  death  of  the 
testator. 

An  intermediate  account  is  one  filed  at  any  time  previous 
to  the  final  account.  It  may  be  made  at  any  time  by  an 


72 

executor  voluntarily,  or  he  may  be  ordered  to  file  one  at 
any  time  by  the  Surrogate. 

A  final  account  is  one  submitted  showing  the  balance  in 
the  hands  of  the  executor  available  for  distribution  prior 
to  its  judicial  settlement. 

The  executor  charges  himself  with  the  assets  of  the 
estate  and  any  balance  of  increase,  of  principal  or  excess  of 
income  receipts  over  income  expenditure. 

He  credits  himself  with  all  payments  made  by  him,  in- 
cluding commission. 

75.  What  is  the  duty  of  the  assignee's  accountant  in 
the  case  of  an  assignment?  How  is  the  inventory  stated? 
What  are  included  in  the  schedules  ?  How  is  the  assignee's 
account  stated  for  submission  to  the  court?  What  does 
the  summary  of  account  usually  include?  With  what  does 
the  assignee  charge  himself?  For  what  does  he  take 
credit? 

To  prepare  an  inventory  of  all  property  coming  into  the 
possession  of  the  assignee  and  to  prepare  a  statement  of 
affairs.  .He  should  also  open  a  new  set  of  books  designed 
to  show  in  detail  the  transactions  of  the  assignee.  The  in- 
ventory states  in  detail  particulars  of  all  the  property,  the 
quantity  and  estimated  value.  In  the  schedules  are  con- 
tained a  list  of  accounts  receivable  at  nominal  and  esti- 
mated realizable  value,  also  accounts  and  bills  payable. 

Preferred  claims  are  deducted  from  the  assets.  It  should 
be  shown  in  schedule  form,  and  disclose  the  amount  of 
property  which  came  into  his  possession,  the  amounts  re- 


73 

ceived  by  him,  and  his  expenses  of  administration.  It 
should  also  show  the  balance  available  for  distribution 
amongst  the  creditors.  The  summary  of  account  shows  the 
total  amounts  received  as  per  schedule,  and  total  expendi- 
tures; also  the  balance  available  for  distribution. 

He  charges  himself  with  all  that  he  receives  and  takes 
credit  for  all  that  he  expends.  He  charges  himself  also 
with  any  increase  over  estimate  in  the  amount  realized  by 
assets. 

76.  State  and  explain  the  two  principal  purposes  for 
which  accounts  are  kept. 

The  two  principal  purposes  for  which  accounts  are  kept 
are:  (a)  To  preserve  such  an  explicit  record  of  every 
transaction  that  its  exact  nature  may  be  perceived  at  once. 

(b)  To  classify  them  in  such  a  manner  that  the  total 
result  of  the  transactions  for  any  given  period  may  be 
readily  obtained. 

77.  What  important  features  of  a  business  are  shown 
by  double  entry  bookkeeping  that  single  entry  books  can 
not  show?    Explain  clearly. 

(a)  Not  only  the  amount  of  profit  or  loss  for  any  given 
period    is  a  seer  tamable,  but  also   the  source   of   same — 
whether  by  departments  or  class  of  goods  sold.     In  single 
entry,  the  amount  of  the  profit  only  is  shown  by  comparing 
the  total  resources  by  the  total  liabilities. 

(b)  Not  only  is  the  net  profit  shown  by  means  of  the 
profit  and  loss  account,  but  also  the  gross  profit  by  means 


74 

of  the  merchandise  or  trading  account.  In  single  entry 
the  merchandise  account  is  not  kept.  By  means  of  this 
account,  it  is  also  possible  to  determine  the  actual  or  ap- 
proximate amount  of  the  inventory  at  the  end  of  any  given 
period  by  calculating  the  percentage  of  gross  profit  for 
past  years.  This  is  a  most  important  and  valuable  piece  of 
information  in  the  case  of  a  fire. 

(c)  All  expenditure  must  be  recorded  and  all  receipts 
accounted  for. 

(d)  The  trial  balance  is  prima  facie  evidence  of  the  cor- 
rectness of  the  posting,  and  incidentally,  comparative  sta- 
tistics of  monthly  receipts  and  expenditures  under  classified 
headings  are  available. 

(e)  The  use  of  the  columnar  system  in  books  of  original 
entry  minimizes  the  labor  of  posting  and  facilitates  analyti- 
cal information. 

(/)  The  superior  facility  offered  for  an  exhaustive  and 
rapid  audit  is — to  that  extent — a  deterrent  from  fraudulent 
entries  and  other  irregularities. 

78.  Describe  the  ordinary  merchandise  account  and 
state  its  purpose.  Does  it  fully  accomplish  the  purpose 
desired?  Give  reasons  for  your  answer. 

The  ordinary  merchandise  account  is  first  charged  with 
the  amount  of  the  inventory  at  the  commencement  of  any 
fiscal  period,  and  with  all  purchases  and  returns  by  cus- 
tomers. It  is  credited  with  all  sales;  with  returns  to 
creditors,  and  with  the  inventory  at  the  end  of  the  period. 


75 

The  excess  of  the  credit  over  the  debit  side  is  the  amount 
of  gross  profit,  which  is  charged  to  merchandise  account, 
and  credited  to  profit  and  loss  account.  Its  purpose  is  to 
show  the  amount  of  gross  profit  and  the  amount  of  pur- 
chases and  sales. 

It  does  not;  because  the  amount  of  the  inventory,  an 
indispensable  factor  in  determining  the  gross  profit,  is 
never  shown,  except  when  specially  taken  at  the  end  of  a 
stated  period.  Again,  while  the  amounts  of  sales,  pur- 
chases and  returns  may  be  found  by  analysis  of  the  contents 
of  the  account,  the  balance  as  it  appears  at  the  end  of  every 
month  in  the  trial  balance  is  meaningless. 

79.  Describe  a  voucher  record  and  the  process  of  con- 
ducting a  vouchers  payable  system.  State  fully  the  ad- 
vantage of  this  system. 

A  voucher  record  is  a  columnar  journal  designed  to  do 
away  with  the  necessity  of  keeping  ledger  accounts  with 
creditors  individually.  It  is  ruled  with  parallel  columns 
for  voucher  number,  date,  name  of  creditor,  total  amount 
of  bill,  and  as  many  additional  columns  as  may  be  found 
necessary  to  distribute  the  analysis  under  classified  de- 
scriptive headings  of  purchases.  The  total  of  the  first 
column  is  posted  monthly  to  the  credit  of  an  account  called 
"  vouchers  payable  "  in  the  ledger,  and  the  separate  total  of 
each  of  the  other  columns  is  posted  to  the  debit  of  the 
nominal  account  corresponding  to  its  title — thus  effecting 
the  double  entry.  As  bills  are  passed  for  payment,  they 


76 

are  encased  in  a  voucher  folder  whose  face  bears  analytic 
columns,  corresponding  to  those  in  the  voucher  record 
book.  The  particulars  are  then  filled  in  and  the  voucher 
is  passed  on  to  be  recorded.  When  a  check  is  sent  in  pay- 
ment, it  is  charged  in  the  voucher  payable  column  in  the 
cash  book,  the  total  of  which  is  posted  monthly  to  the  debit 
of  the  vouchers  payable  account  in  the  ledger.  The  bal- 
ance of  this  account  represents  the  amount  of  accounts  pay- 
able. The  advantage  of  the  system  is  the  facility  afforded 
for  minute  analysis  in  the  record  of  expenditure,  and  the 
enormous  saving  of  labor  in  posting. 

80.  Recommend,  with  all  necessary  explanations,  a  set 
of  books  peculiarly  adapted  to  the  use  of  a  firm  that  deals 
exclusively  in  butter,  cheese  and  eggs,  at  wholesale,  retail 
and  on  commission,  and  has  three  branches  in  the  same 
city,  the  books  being  kept  at  the  main  store. 

It  is  assumed  that  all  merchandise  will  be  purchased  by, 
consigned  to,  and  supplied  to  the  branch  stores  from  the 
main  office.  Each  branch  store  should  have  two  cash 
books,  sales  books,  and  credit  books  for  alternate  days — • 
which  would  be  sent  to  the  office  to  be  recorded  on  the 
books  kept  there.  Cash  books  should  be  ruled  for  cash 
sales  and  credit  sales — separate  columns  being  provided  for 
butter,  amount  and  Ibs. ;  cheese,  amount  and  Ibs. ;  eggs, 
amount  and  dozens.  The  sales  books  should  be  ruled  so 
as  to  afford  the  same  information.  The  total  quantities 
sold  should  be  monthly  deducted  from  the  quantities 


77 

charged  to  the  branches  by  the  main  office;  the  difference 
should  show  the  inventory. 

The  actual  inventory  will  always  be  actually  less,  and 
the  difference,  the  shrinkage,  should  be  written  off 
monthly. 

At  the  main  office  should  be  kept  a  General  Ledger, 
Purchase  Ledger,  two  branch  store  Customers'  Ledgers, 
Cash  Book,  Purchase  Journal,  Sales  Journal,  and  for 
record  of  consignment  "  pick  up "  sheets. 

Purchases  should  be  passed  through  the  purchase  jour- 
nal as  to  quantity  of  commodity  and  amounts,  credited  to 
the  vendor,  and  charged  in  the  General  Ledger  monthly  to 
the  commodity  account. 

Sales  should  be  passed  through  the  Sales  Journal  in  the 
same  way,  charged  to  customers  or  branch  stores,  and 
credited  monthly  to  the  commodity  accounts. 

Total  purchases,  less  total  sales,  should  show  the  inven- 
tory monthly;  the  shrinkage  should  be  written  off. 

The  General  Cash  Book  should  have  columns  for  cash 
received  daily  from  each  store  and  that  received  at 
main  office.  Total  received  for  each  store  is  monthly 
credited  to  customers  controlling  account  for  each 
branch  store  kept  in  General  Ledger.  The  General  Cash 
Book  should  also  have  rulings  for  expense  columns  for 
each  branch  store  and  such  additional  ones  as  may  be 
necessary  to  divide  up  the  business  of  the  main  office. 

Branch  store's  customers'  ledgers  should  be  daily  posted 
— sales,  cash  and  returns — from  books  sent  up  to  the  main 


78 
/ 

office  and  a  general  ledger  account  in  each  will  make  them 

self-balancing — corresponding  in  amount  to  the  branch 
store's  customers'  controlling,  account  in  the  General 
Ledger. 

Consignments  should  each  receive  a  "lot"  number  and 
particulars  as  to  quantities,  &c.  As  goods  are  disposed  of 
they  should  be  entered  on  the  sheet  and  a  sales  slip  passed 
through  to  charge  customer  in  Sales  Journal.  When  a 
"  lot "  is  disposed  of,  the  amount  realized  less  commission 
and  expenses  should  be  credited  to  consignor  on  the 
General  Ledger  through  the  Purchase  Journal  and  the 
total  net  cost  thus  shown  charged  to  the  particular  com- 
modity account.  A  check  to  consignor  will  then  close  up 
the  account. 

At  the  main  office  the  following  results  can  be  shown: 
(a)  Amount  and  quantity  of  every  commodity  pur- 
chased and  sold  by  main  stores  and  the  gross  profit  and 
net  profit  on  the  whole  business.  Amount  and  quantity 
of  every  commodity  sold  by  branch  stores,  the  amount  of 
stock  on  hand,  the  amount  owing  by  their  customers  and 
the  gross  and  net  profit  earned. 

81.  Define  the  following  terms  as  applied  to  accounts: 
Personal,  real,  nominal,  resource,  liability.  Mention  two 
real  and  three  nominal  accounts. 

Personal — with  persons. 
Real — real  value. 


Nominal — names  only.  They  contain  items  of  income 
and  expenditure. 

Resources — another  for  assets — i.  e.,  what  one  owns, 
either  in  possession  or  action. 

Liability — what  is  owed. 

Two  real  accounts — cash,  plant  and  machinery. 

Three  nominal  accounts — interest,  discount,  wages. 

82.  Describe  the  nature  of  the  following  accounts: 
Consignment,  trading,  suspense,  construction,  subscription. 

A  consignment  account  is  one  kept  by  a  person  called 
the  consignee  to  record  his  transactions  in  selling  the  goods 
of  another  person,  called  the  consignor.  It  records  cost 
and  selling  price  of  goods,  expenses  attending  the  handling 
of  same,  and  his  profit  on  the  transaction. 

A  trading  account  is  designed  to  show  the  gross  profit 
on  sales.  It  is  charged  with  purchases,  and  expenses  at- 
tending the  same,  and  credited  with  sales,  and  with  inven- 
tory at  time  of  stock  taking.  The  excess  of  the  credit  side 
over  the  debit  side  is  the  gross  profit. 

A  suspense  account  is  one  opened  to  contain  those  ac- 
counts receivable  whose  realization  is  doubtful.  Any 
amount  received  on  account  should  be  credited  and  the  bal- 
ance, if  found  uncollectable,  should  be  carried  to  Bad  Debt 
account. 

A  Construction  Account  is  one  designed  to  record  the 
cost  of  constructing  buildings,  roadbeds,  etc.,  of  railroads. 
It  comes  under  the  head  of  capital  expenditure. 


80 

A  subscription  account  should  be  charged  with  the  total 
amount  of  capital  stock  offered  for  sale.  The  journal  en- 
try would,  of  course,  be — Subscription  Account  Dr.,  to 
Capital  Stock  Account. 

83.  Formulate    and   explain   a   rule   for   determining 
whether  an  account  should  be  debited  or  credited  in  any 
given  transaction.      Explain  the  application  of  the  prin- 
ciple. 

(a)  Personal  accounts :  if  the  amount  will  be  received, 
debit ;  if  not,  credit. 

(b)  Real  accounts:  debit  the  account  which  is  increased, 
and  credit  the  person  from  whom  received. 

(c)  Nominal  accounts:  debit  what  is  not  to  be  received; 
credit  what  is. 

Example  (a)  Sold  goods  to  A;  the  amount  will  be  re- 
ceived; debit  A.  Purchased  goods  from  B,  the  amount 
will  not  be  received;  credit  B,  etc. 

84.  Describe  a  safe  and  easy  system  of  keeping  the  ac- 
count of  goods  returned,  (a)  as  buyer,  (b)  as  seller. 

(a)  As  buyer,  when  goods  are  returned,  the  stockkeeper 
should  make  out  a  slip  with  name  of  firm  to  whom  returned 
quantity  of  goods,  price,  etc.,  and  pass  same  in  to  the  book- 
keeper for  entry  in  the  return  book  and  for  mail  advice. 
Each  slip  should  be  consecutively  numbered,  be  signed  by 
stockkeeper,  and  by  shipping  clerk.  After  being  entered 
in  the  return  book  by  the  bookkeeper,  each  slip  should  be 
preserved  as  a  voucher. 


81 

(b)  As  seller,  particulars  of  goods  returned  should  be 
entered  on  a  slip  and  turned  over  to  the  stock  clerk,  who 
should  enter  in  stock  book,  sign  slip,  and  pass  on  to  book- 
keeper for  entry  in  the  credit  book.  Slips  should  be  con- 
secutively numbered  and  preserved  as  vouchers.  In  each 
case,  the  design  should  be  to  have  the  record  pass  through 
as  many  hands  as  possible. 

85.  State  explicitly  and  fully  the  function  of  the  profit 
and  loss  account.     Distinguish  between  the  function  of  the 
profit  and  loss  account  and  that  of  the  balance  sheet. 

The  function  of  the  profit  and  loss  account  is  to  deter- 
mine by  a  comparison  of  the  balances  of  the  nominal  ac- 
counts whether  a  profit  or  loss  has  been  made  for  some 
stated  period.  If  the  total  credit  balances  preponderate,  a 
profit  has  been  earned;  if  otherwise,  a  loss.  While  the 
function  of  the  profit  and  loss  account  is  to  determine  this 
point,  that  of  the  balance  sheet  is  to  disclose  the  exact 
financial  position  of  a  firm  at  a  given  moment.  It  also 
confirms  the  result  shown  in  the  profit  and  loss  account  by 
exhibiting  a  corresponding  increase  in  the  surplus  of  assets 
over  liabilities. 

86.  Some  proprietors  keep  a  private  ledger  of  their 
business,  to  which  bookkeepers  and  clerks  have  no  access. 
Explain  the  purpose  of  such  a  book,  and  show  what  ac- 
counts it  usually  contains  and  how  it  is  made  to  agree  with 
the  general  ledger. 

The  purpose  of  the  private  ledger  is  to  contain  such  ac- 


82 

counts  as  may  be  deemed  desirable  to  be  kept  from  the 
knowledge  of  the  general  office  staff.  It  usually  contains 
capital  account,  profit  and  loss  account,  loans,  investments, 
etc.  Appended  to  the  general  trial  balance  sheet,  is  an 
account  marked  "  Private  Ledger."  The  difference  between 
the  total  debit  and  credit  balances  in  the  private  ledger  in- 
serted here  should  make  the  general  trial  balance  correct. 
If  this  balance  be  kept  in  the  hands  of  the  principal,  a  per- 
fect check  against  "  forced  balances  "  can  always  be  main- 
tained. 

87.  State  the  theory  and  purpose  of  each  of  the  fol- 
lowing, and  show  wherein  they  differ:  (a)  reserve  fund, 
(b)  sinking  fund. 

Properly  speaking,  any  "  fund  "  should  be  represented  by 
a  debit  balance,  i.  e.,  it  should  be  in  the  form  of  some 
specific  investment.  The  corresponding  liability  would  be 
the  "  account."  A  reserve  "  account " — not  "  fund  " — is 
formed  by  setting  aside  periodically  some  portion  of  the 
profits  of  a  concern  by  a  charge  to  revenue  account,  and  a 
credit  to  reserve  account.  The  purpose  of  the  reserve 
should  always  be  clearly  stated  and  used  only  for  such 
purpose.  If  it  be  a  reserve  "  fund,"  the  amount  should  be 
represented  by  some  specific  asset. 

The  difference  between  the  reserve  fund  and  the  sinking 
fund  is  this :  That  whereas  the  necessity  of  the  former  may 
be  contingent — that  of  the  latter  is  absolute — inasmuch  as 
it  is  a  sum  of  money  accumulated  by  installments  to  liqui- 
date a  liability  of  stated  magnitude  at  a  designated  time. 


83 

88.  State  the  general  theory  of  the  balance  sheet.    On 
what  theory  does  the  English  form  of  balance  sheet  differ 
from  the  continental  and  American  form?    Give  an  argu- 
ment either  for  or  against  the  English  form. 

The  general  theory  of  the  balance  sheet  is,  that  it  is  an 
exhibit  in  condensed  form  of  all  the  accounts  in  the  ledger 
at  a  particular  moment  of  time.  The  English  form  differs 
from  the  American  and  continental  on  the  theory  that  the 
latter  represents  the  closing  balance  account  as  exhibited  in 
journal  form,  while  the  former  represents  the  opening 
form.  The  advocates  for  the  English  form  deny  that 
the  balance  sheet  is  an  account;  and  also  affirm  that  in 
their  form  the  proprietor  is  a  debtor  for  his  liabilities  and 
a  creditor  for  his  assets.  There  is  no  doubt  that  the  pas- 
sage of  the  English  Companies  Act  of  1862  is  largely  re- 
sponsible for  the  now  almost  universal  adoption  of  the 
English  form  (liabilities  on  the  left  hand  side  and  assets 
on  the  right)  in  that  country.  The  unanswerable  argu- 
ment against  the  English  form  is,  that  the  balance  sheet 
is  not  an  extract  from  the  journal,  but  from  the  ledger, 
and  that  being  so,  there  is  no  valid  reason  why  the  sides 
of  the  accounts  should  be  transposed. 

89.  Define  permanent    assets,    floating    assets.    Show 
how  each  should  be  treated  in  ascertaining  the  standing 
of  a  business  at  any  specified  time.      State  the  theory  of 
each  step  in  the  process. 

Permanent  assets  are  those  continually  required  for  the 
proper  conduct  of  a  business,  and  being  constantly  used, 


84 

are  subject  to  depreciation  in  value  through  wear  and  tear. 
In  ascertaining  their  value  at  any  given  time,  purchase 
prices  should  be  examined  and  each  account  scrutinized  to 
see  that  repairs  and  renewals  have  not  been  added  to  the 
cost.  Further,  care  should  be  exercised  to  see  that  a 
proper  amount  has  been  written  off  periodically  for  de- 
preciation. If  any  doubt  still  remains  as  to  their  actual 
value,  the  services  of  a  competent  appraiser  should  be  in- 
voked. 

Floating  assets  are  those  which  fluctuate  in  amount  from 
time  to  time  and  constitute  the  working  capital  of  the 
business. 

Cash  can,  of  course,  be  verified,  merchandise  can  be  ap- 
praised, bills  receivable  can  be  inspected,  accounts  re- 
ceivable can  be  gone  over,  and  a  proper  deduction  made 
for  doubtful  accounts,  discounts,  etc. 

90.  Describe  two  forms  of  sales  ledger  and  the  process 
of  entering  the  sales  in  each.  Explain  the  advantage  of 
each  form. 

The  first  form  would  be  the  ordinary  ledger  ruling; 
sales  as  made  being  charged  to  customer  under  proper 
date,  folio  of  sales  book,  "  To  Sundries."  While  quite  con- 
venient for  the  record  of  ordinary  mercantile  transactions, 
"  sundries  "  would  be  ordinarily  unintelligible  to  retail  cus- 
tomers. For  retail  stores,  another  form  of  ruling  would 
be  advantageous  containing  two  parallel  debit  columns  and 
the  ordinary  credit  column.  The  first  column  would  be 


85 

a  detailed  transcript  of  the  sales  book  as  to  items — the  total 
of  each  bill  being  extended  into  the  second  column — which 
is  the  one  considered  by  the  bookkeeper  in  taking  off  his 
trial  balance.  The  first  form  entails  less  work  in  posting, 
but  the  second  one  is  necessary  for  retail  stores,  as  the 
statement  rendered  monthly  can  be  made  out  in  itemized 
form  from  the  ledger  direct,  instead  of  the  bookkeeper 
having  to  look  up  his  items  from  the  sales  book. 

91.  What  is  meant  by  double  entry  and  how  does  it 
differe  essentially  from  single  entry?  Show  the  advan- 
tages of  recording  every  business  transaction  in  two  or 
more  different  accounts. 

By  DOUBLE  ENTRY  is  meant  the  recording  of  the 
same  amount  twice;  once  on  the  debit  and  once  on  the 
credit  side  of  the  ledger.  The  entries,  either  individual, 
or  in  gross  total  equalling  one  another,  balance.  This 
balance  check  demonstrates  the  mathematical  accuracy  of 
the  posting,  and  is  the  essential  feature  of  double  entry  as 
distinguished  from  single  entry,  where  each  amount  is 
only  recorded  on  one  side  of  the  ledger,  either  as  a  debit  or 
credit.  The  advantage  of  recording  every  business  trans- 
action in  two  or  more  accounts  is,  that  if  assets  are  created, 
the  source  of  their  derivation  is  recorded  at  the  same  time ; 
if  liabilities  are  incurred,  the  reason  for  same  is  stated. 
If  revenue  expenditure  is  charged,  it  appears  under  specific 
heading,  and  the  corresponding  liability  recorded;  if 
revenue  income  be  entered,  it  shows  the  source  from  which 


86 

it  arises.  Finally,  the  profit  or  loss,  as  disclosed  by  a 
comparison  of  the  totals  of  the  revenue  accounts,  is  con- 
firmed by  the  increase  or  decrease  of  assets  over  liabilities 
in  the  balance  sheet. 

92.  State  what  is  indicated  by  each  of  the  following 
ledger  accounts,  (a)  when  the  account  shows  a  debit  bal- 
ance, (b)  when  the  account  shows  a  credit  balance;  loss 
and  gain,  merchandise,  customers'  ledger,  purchase  ledger, 
Chicago  branch  or  agency,  insurance,  rent,  interest,  com- 
mission. Explain  fully. 

(a)  Debit  balance : 

Loss  and  gain — the  amount  of  the  loss  for  a  given  fiscal 
period. 

Merchandise — (when  active)  that  the  amount  of  sales 
has  not  yet  exceeded  the  amount  of  the  inventory  at  the 
commencement  of  the  period  and  purchases  to  date ;  (when 
passive)  the  amount  of  the  inventory  at  some  specific  date. 

Customer^'  Ledger — total  of  account  receivable. 

Purchase  Ledger — excess  of  payments  to  creditors  over 
amounts  credited  to  them. 

Chicago  Branch  or  Agency — amount  due  by  same. 

Insurance — amount  paid  for  Insurance. 

Rent — amount  paid  for  Eent. 

Interest — amount  paid  for  Interest. 

Commission — amount  paid  for  Commission. 
(b)   Credit  balance: 

Profit  and  Loss — amount  of  net  profit  made  for  a  certain 
period. 


87 

Merchandise — excess  of  sales  over  purchases  and  inven- 
tory at  commencement  of  period.  When  present  inven- 
tory is  added  to  credit  side,  or  debited  from  debit  side,  the 
excess  as  balance  shows  the  Gross  Profit. 

Customers'  Ledger — total  amount  overpaid  by  cus- 
tomers. 

Purchase  Ledger — total  amount  of  accounts  payable. 
Chicago  branch  or  agency — the  profit  made  by  same. 


Insurance 
Eent 
Interest 
Commission 


Excess  of  income  over 
expenditure. 


93.  Describe  a  private  ledger.  Describe  the  process 
of  opening  a  private  ledger  for  a  mercantile  firm.  What 
relation  would  the  private  ledger  bear  to  the  general  trial 
balance  ? 

A  private  ledger  should,  as  its  title  imports,  be  designed 
to  contain  accounts,  the  details  of  which  it  is  deemed  de- 
sirable to  keep  from  the  knowledge  of  the  general  office 
staff,  and  to  which  only  principals  and  their  confidants 
should  have  access.  Ordinarily  it  would  contain  the  cap- 
ital investments,  profit  and  loss,  and  such  other  accounts 
as  would  be  needful  to  determine  and  record  increase  or 
decrease  of  capital  or  surplus. 

In  opening  such  a  ledger  for  a  mercantile  firm,  the 
balances  of  such  accounts  as  are  intended  to  be  kept  in  it, 
should  be  entered  in  one  total  in  a  "  controlling  account " 
in  the  general  ledger.  All  items  posted  in  the  private  ledger 


88 

could  be  entered  by  totals  in  this  account,  and  then  a 
general  trial  balance  could  be  taken  off  without  disclosing 
the  initial  contents  of  the  private  ledger. 

94.  Define    auditing,    accounting,     bookkeeping,    and 
show  the  relation  of  each  to  the  others. 

Bookkeeping  is  the  recording  of  transactions  in  proper 
books  of  account. 

Accounting  is  the  designing  of  forms  of  account  and 
systems  to  be  carried  out  in  the  bookkeeping  so  as  to  show 
the  results  in  proper  forms.  The  work  of  the  accountant 
is  generally  constructive. 

Auditing  is  the  examination  and  verification  of  the  work 
done,  and  is  occupied  in  detecting: 

(1)  Errors  of  principal;  (2)  technical  errors;  (3) 
fraud. 

The  work  of  the  auditor  is  generally  then  analytical. 

95.  You  are  required  to  suggest  a  method  of  bookkeep- 
ing and  to  undertake  the  annual  balancing  of  the  books 
of  a  large  wholesale  or  jobbing  establishment.   What  gen- 
eral methods  in  the  bookkeeping  would  you  recommend, 
and  what  plan  would  you  adopt  to  expedite  your  work  ? 

In  general,  it  would  be  desirable  to  have  such  properly 
designed  books  of  account  on  the  columnar  system  as 
would  (1)  insure  the  smallest  labor  in  posting,  (2)  give 
the  fullest  amount  of  detailed  departmental  statistics  as  to 
income  and  expenditure;  and  (3)  would  afford  the  greatest 
facility  for  rapid  and  systematic  audit. 


89 

In  the  bookkeeping  method,  the  ledgers  should  be  di- 
vided up  on  such  principles  as  the  magnitude  of  the  busi- 
ness called  for  and  each  one  made  self  balancing.  Prop- 
erly kept,  controlling  accounts  in  the  general  ledger  would 
enable  the  books  to  be  closed  and  balance  sheet  drawn  up 
at  any  time  without  waiting  for  accurate  schedules  of  ac- 
counts receivable  and  payable  to  be  taken  off  from  the 
other  ledgers. 

96.  Describe  a  sinking  fund.  How  should  the  account 
of  such  a  fund  be  conducted  in  the  case  of  a  manufactur- 
ing corporation  that  bonds  its  works  for  $100,000,  pay- 
able in  twenty  years,  and  wishes  to  accumulate  during  that 
period  the  sum  necessary  to  retire  the  bonds  at  maturity? 

A  sinking  fund  is  the  term  applied  to  an  account  to 
which  is  charged  such  a  sum  (kept  invested)  from  time  to 
time,  as  will  (with  or  without  interest)  equal  a  given  lia- 
bility, which  it  is  desired  to  extinguish  at  the  end  of  a 
given  term  of  years.  In  the  case  above,  the  fund  could  be 
raised,  (a)  by  investing  $5,000  annually  and  crediting  the 
income  to  surplus  or  reserve  account;  (b)  by  investing 
such  a  sum  annually  as  would,  with  interest  at  a  specified 
rate,  amount  to  the  sum  of  $100,000  in  twenty  years.  Ac- 
cording to  the  latter  method,  it  is  found  that  $1  invested 
annually  for  twenty  years  at  5  per  cent  compound  interest- 
will  at  the  expiration  of  that  time,  amount  to  $34,719. 

$100,000.00 

-=$2,880.27. 
$34,719 


90 

So  $2,880.27  invested  annually  at  5  per  cent  compound 
interest  in  twenty  years  amount  to  $100,000. 

That  sum  therefore  should  constitute  the  annual  con- 
tribution to  the  sinking  fund. 

97.  What  is  a  controlling  account?  Give  an  illustra- 
tion of  the  use  of  such  an  account. 

Controlling  account  is  the  title  of  an  account  so  kept  in 
the  general  ledger  as  to  show  exactly  in  gross  the  amount 
of  outstanding  accounts  receivable  or  payable,  without 
the  necessity  of  waiting  for  the  proved  schedules  from  the 
bought  and  sales  ledgers.  If  this  account  be  kept  by  one 
person  and  the  other  ledgers  divided  up  among  several 
others,  the  correctness  of  their  contents  as  evidenced  by 
schedules  is  controlled  by  the  controlling  account,  e.  g., 
their  accuracy  is  tested  and  proved  by  the  figures  called 
for  in  the  controlling  account.  As  an  illustration,  take 
"controlling  account"  customers'  ledgers.  Say  that  the 
total  amount  due  by  customers  at  time  of  opening  the 
account  was  $10,000 : 

To  Balance  ....$10,000.00     By  Cash    $4,250.00 

To  Sales   5,000.00     By  Discount   ....      250.00 

Total  amount  of  accounts  receivable  are  at  once  found 
to  be  $10,500.00,  and  the  schedules  in  the  sales  ledger 
should  equal  this  amount. 

The  value  of  this  account  can  be  estimated  when  it  is 
seen  that  at  the  close  of  any  fiscal  period  a  balance  sheet 


91 

can  be  very  quickly  made  up  without  waiting  for  the 
proving  of  the  trial  balance  by  means  of  correct  schedules 
of  accounts  receivable  and  payable. 

98.  Show    what    is    meant    by    the    following    terms: 
Closing  the  books,  balancing  the  books,  making  out  a  state- 
ment, preparing  a  balance  sheet,  taking  off  a  trial  balance. 

Closing  the  books,  means  closing  out  nominal  accounts 
into  the  profit  and  loss  account,  preparatory  to  making  up 
a  balance  sheet. 

Balancing  the  books  means  checking  the  postings, 
etc.,  and  proving  the  correctness  of  same  by  means  of  a 
correct  "  trial  balance." 

Making  out  a  statement,  means  the  rendering  of  a  copy 
of  the  items  on  each  side  of  a  ledger  account  showing  bal- 
ance due  from  a  debtor. 

Preparing  a  balance  sheet,  means  the  making  up  in 
proper  form  of  the  total  assets  and  liabilities  of  a  firm  at 
a  given  date,  with  proper  references  to  schedules,  etc. 

Taking  off  a  trial  balance,  means  the  drawing  off  on 
sheets  of  all  the  balances  contained  in  a  ledger  and  proving 
the  correctness  of  the  same  by  the  total  footings  of  debit 
and  credit  balances  being  equal. 

99.  Describe  a  means  for  the  protection  of  a  manu- 
facturing company  in  the  purchase  of  necessary  materials 
and  supplies  and  in  the  payment  for  such  materials  and 
supplies. 


92 

The  principal  points  to  be  borne  in  mind  in  devising  a 
protective  system,  are : 

(a)  In  purchasing  necessary  materials  and  supplies : 

1.  To  be  able  to  tell  by  means  of  records  who  requested 
their  purchase. 

2.  For  what  purpose  they  were  required. 

3.  Who  signed  the  order  for  purchases. 

4.  Who  received  the  goods. 

5.  Who  recorded  their  entry  into  stock. 
6."  Who  recorded  consumption  or  sale. 

Properly  designed  requisitions,  calling  for  signatures  at 
every  stage  of  the  handling  of  things  purchased,  also  fix- 
ing responsibility  upon  a  certain  individual  will  constitute 
a  thorough  check,  and  the  more  hands  the  requisitions, 
etc.,  pass  through,  the  less  liability  there  is  of  collusion  on 
the  part  of  dishonest  employees. 

(b)  In  paying  for  same,  orders,  etc.,  would  be  attached 
to  bills  which  should  be  checked  as  to  correctness  of  prices 
by  the  party  ordering  them ;  passed  into  the  counting  house 
for   checking   of   extensions   and   additions   before   being 
passed  through  the  books  for  payment.     It  need  scarcely 
be  added  that  payments  should  always  be  made  by  check. 

100.  State  the  process  of  making  a  trial  balance  of  a 
single  entry  ledger.  How  may  the  loss  or  gain  be  deter- 
mined from  books  kept  by  single  entry? 

In  order  to  take  off  a  trial  balance  of  a  single  entry 
ledger,  it  must  be  pre-supposed  that  every  item  posted  in 


93 

the  ledger  has  been  passed  through  the  day  book  or  jour- 
nal. The  footing  of  both  sides  of  each  ledger  account 
should  be  entered  on  a  sheet  and  the  excess  of  the  total  of 
one  side  of  all  the  accounts  over  the  other  will  be  the 
"  balance  of  the  ledger."  If  posted  and  taken  off  correctly, 
they  should  exactly  equal  the  total  of  the  difference  of  the 
total  sides  of  the  day  book.  The  proof  of  the  correctness 
therefore  consists  in  equal  balances  of  day  book  and  ledger 
instead  of  equal  debits  and  credits. 

The  loss  or  gain  is  determined  from  books  kept  by  single 
entry  by  comparing  the  total  assets  with  the  total  lia- 
bilities, the  excess  of  the  one  over  the  other  constituting 
the  net  gain  or  loss  for  the  period  under  review. 

101.  A  mercantile  house  draws  on  its  customers  at 
sight,  depositing  its  drafts  in  bank.     Occasionally  a  draft 
is  returned  dishonered.     What  entry  should  be  made  when 
a  draft  is  drawn,  and  what  counter-entry  should  be  made 
when  the  draft  is  returned  dishonered? 

Sight  drafts  should  be  treated  as  checks  and  should  be 
credited  on  the  cash  book  to  the  person  on  whom  drawn 
previous  to  deposit  in  bank. 

When  the  draft  is  returned  dishonered,  a  check  should 
be  given  to  the  bank  in  payment  of  same,  and  expenses  (if 
any),  which  should  be  charged  in  the  cash  book  to  the 
party  by  whom  draft  was  dishonered. 

102.  Describe  a  plan  for  handling  invoices  of  materials 
purchased  for  the  use  of  a  factory,  payments  for  which 
are  to  be  made  at  the  best  discount  date. 


94 

The  simplest  and  most  expeditious  method  is,  after  the 
invoices  have  been  checked  and  passed  through  the  books, 
to  deposit  them  in  files  (each  file  containing  one  month's 
due  payments)  under  the  date  for  payment  which  will 
enable  the  best  discount  rate  to  be  obtained.  The  cashier 
daily  draws  checks  for  all  invoices,  due  on  that  particular 
day  as  per  file. 

103.  Describe  an  approved  system  of  recording  and 
vouching  petty  cash  transactions. 

A  check  should  be  drawn  for  such  an  amount  as  may 
be  deemed  advisable,  which  is  charged  in  the  general 
ledger  to  "  office  cash  account."  The  cashier  should  per- 
sonally enter  same  in  the  petty  cash  book.  The  one  side 
of  the  petty  cash  book  should  record  receipts  from  general 
cashier;  the  other  should  be  ruled  with  as  many  columns 
as  may  be  necessary  to  classify  the  expenditure  made. 
Cash  as  paid  out  should  be  charged  under  its  proper  col- 
umn, and  there  should  be  consecutively  numbered  vouchers 
for  every  payment,  with  such  supplementary  proof  as  is 
obtainable.  Carfares  vouchers  might  be  initiated  by  per- 
sons to  whom  paid;  postage  stamps  vouchers  initiated  by 
general  cashier,  etc.  At  the  end  of  every  month  the  ex- 
penses are  added  and  the  balance  brought  down.  The 
totals  of  the  expense  columns  are  charged  (by  journal 
entry)  to  the  proper  account  in  the  ledger,  and  office  cash 
account  is  credited.  The  balance  of  the  ledger  account 
would  then  agree  with  the  balance  shown  by  the  petty  cash 


95 


book.      It  need  hardly  be  added  that  no  ledger  accounts 
should  ever  be  paid  through  the  petty  cash. 

104.  Give  the  ruling  of  a  stock  or  shares  ledger  for  a 
corporation.  Show  how  this  book  is  kept,  and  indicate 
its  relation  to  the  general  books  of  account. 


DR. 


JOHN  BROWN. 


CR- 


Date. 

Certificates 

J 

002 

Z 

Par 

Value 

Date 

Certificates 

In- 
stall- 
ments. 

OCQ 

fc 

Pa 
Vali 

March 

6 
6 

Renewed 
by  No.40 
Transf  d  to 
J.  Davis 

400 

100 

Feb'r 
March 

4 
6 

No.  10 
No.  40 

500 

400 

This  book  is  kept  to  show  the  number  of  shares  held  by 
each  stockholder  of  a  corporation,  as  required  by  law. 
From  it,  voters5  lists  and  dividend  lists  are  prepared.  The 
stockholder  is  credited  with  the  number  of  original  shares 
issued  to  him,  or  with  those  he  became  possessed  of  by 
transfer.  He  is  charged  with  the  number  of  shares  he 
transfers  to  other  parties.  Original  stock  is  posted  from 
the  stock  certificate  book ;  transfers  from  the  transfer  book, 
which  is  virtually  the  shares  ledger  journal. 

It  has  no  direct  relation  to  the  general  books  of  account 
further  than  this:  While  the  capital  stock  account  in  the 
general  ledger  shows  the  gross  amount  of  stock  issued, 
the  shares  ledger  gives  the  names  of  the  stockholders  and 
the  amount  of  stock  held  by  each. 


96 


105.  Illustrate  a  columnar  cash  book,  a  columnar  jour- 
nal, and  a  columnar  sales  book.  What  general  require- 
ments should  be  observed  in  designing  such  books?  Give 
an  estimate  of  the  utility  of  the  columnar  plan. 

(a)  Cash  Book. 


DR. 


CASH. 


CASH. 


CH. 


d 

d 

i 

3 

oe 
Q 

Name. 

1 
O 

Discou 

•a 

s 

£ 

5 

Name. 

(D 

a 

V 

O 

Discou 

o 

01 

a 

H 

w 

I 

1 

(b)  Journal. 

DR.                                                                                                   CR. 

I 

• 

a 

>H 

| 

•§ 

i 

"3 

Name. 

Name. 

"rt 

'i 

& 

V 

8 

0) 

g 

s 

0 

w 

O 

0 

O 

1 

(c)  Sales  Book. 


Name. 

!    Butter. 

Cheese. 

Egg3. 

Total. 

1 

07 

In  designing  such  books,  the  nature  of  the  business  has 
to  be  carefully  considered  so  as  to  comprehend  in  the  sys- 
tem complete  analysis  of  income  and  expenditure  under 
proper  classification,  and  so  as  to  furnish  full  details  of  the 
origin  of  profit  or  loss  on  every  class  of  goods,  sold  or 
manufactured.  Its  utility  is  of  great  value,  where  the  ends 
as  above  indicated,  are  constantly  borne  in  mind.  The 
amount  of  posting  is  considerably  lessened ;  and  while  there 
is  always  the  possibility  of  items  being  intentionally  or  un- 
intentionally placed  in  wrong  columns,  the  intelligent  ap- 
plication of  the  principle  will  result  in  advantages  greatly 
exceeding  its  weaknesses. 

106.  State  one  general  rule  that  will  embrace  all  the 
principles  governing  double  entry  bookkeeping.      Define 
journalizing,  in  its  broadest  sense. 

For  every  debit  there  must  be  a  credit  of  corresponding 
amount. 

Journalizing  in  its  broadest  sense  is  the  arranging  in 
systematic  form  for  posting  in  the  ledger  the  record  of 
transactions  whose  entry  in  other  books  of  original  entry 
is  not  provided  for. 

107.  What  is  the  result  of  a  debit  entry?  of  a  credit 
entry?    Illustrate  in  the  case  of  an  account  of  each  of  the 
following  classes :    (a)  personal,  (b)  real,  (c)  nominal. 

The  result  of  a  debit  entry  is  the  record  of  an  asset,  or 
of  an  expense.  The  result  of  a  credit  entry  is  the  record 
of  a  liability  or  of  a  source  of  income. 


98 

(a)  Personal — Mr.  B  is  sold  goods  to  the  amount  of 
$20.  An  asset  is  recorded ;  debit  him  with  $20.  I  buy  mer- 
chandise from  Mr.  C  for  $50,  a  liability  is  created,  so  I 
credit  him  with  $50. 

(I)  Real — I  buy  a  building  for  $5,000.  An  asset  is 
created.  I  debit  building  account  with  $5,000. 

(c)  Nominal — I  pay  $500  for  repairs  to  building.  An 
expense  is  recorded  and  expense  account  is  debited.  I  rent 
part  of  the  building  and  receive  $480  for  same.  A  source 
of  income  is  recorded,  so  I  credit  rent  account. 

108.  State  the  characteristic  distinctions  between  single 
entry  bookkeeping  and  double  entry  bookkeeping.  What 
are  the  advantages  of  double  entry  over  single  entry? 

The  characteristic  distinctions  between  single  entry 
bookkeeping  and  double  entry  bookkeeping  are:  (1)  Inas- 
much as  all  transactions  to  be  recorded  are  transfers  of 
money,  or  money's  worth,  every  entry  must  be  made  twice ; 
once  on  the  debit  side,  and  again  on  the  credit  side.  (2) 
Resulting  from  this,  the  total  debits  will  equal  the  total 
credit,  and  the  ledger  be  kept  in  balance.  (3)  That  while 
the  profit  and  loss  account  shows  the  amount  of  profit  or 
loss  for  a  given  period  by  a  comparison  of  income  and 
expenditure,  the  result  so  arrived  at  is  confirmed  by  the 
balance  sheet.  In  single  entry  bookkeeping,  income  and 
expenditure  accounts  are  not  kept,  and  the  profit  or  loss  is 
arrived  at  solely  by  a  comparison  of  the  resources  and  lia- 


99 

bilities  at  the  end  of  any  given  period.     The  advantages 
of  double  entry  over  single  entry  are: 

(1)  The  gross  profit  is  shown  in  the  merchandise  ac- 
count. (2)  The  profit  or  loss,  as  shown  by  the  profit  and 
loss  account,  is  confirmed  by  the  balance  sheet.  (3)  The 
proof  of  the  accuracy  of  amounts  posted  is  demonstrable 
through  the  trial  balance.  (4)  The  profit  and  loss  ac- 
count shows  not  only  the  amount,  but  also  the  sources  of 
profit  or  loss.  (5)  The  profit  or  loss  made  in  every  de- 
partment of  a  store  can  be  shown  separately,  as  well  as  on 
separate  classes  of  merchandise  sold.  (6)  By  means  of 
the  columnar  system  the  labor  of  posting  is  greatly  les- 
sened. (7)  The  facility  with  which  a  thorough  audit 
can  be  made  is  to  that  extent  a  deterrent  from  fraud. 

109.  In  double  entry  bookkeeping,  why  are  the  debits 
on  the  left  and  the  credits  on  the  right  ? 

This  is  probably  only  a  matter  of  historical  develop- 
ment. Originally  there  was  only  one  column.  A  mer- 
chant sold  goods  to  a  customer,  and  debited  him  with  the 
cost.  When  cash  was  paid>  he  credited  him  in  the  same 
column,  and  brought  down  the  balance  (if  any).  This 
caused  many  mistakes,  and  so  a  second  column  was  pro- 
vided for  credit  entries  which  was  placed  further  to  the 
right. 

110.  Define    the    following    accounting    and    business 
terms :  Floating  capital,  fixed  capital,  quick  assets,  floating 
liabilities,  nominal  accounts,  passive  assets,  passive  liabili- 
ties. 


100 

Floating  capital  is  another  term  for  quick  assets.  It  is 
such  portion  of  the  assets  as  is  continually  varying  in 
amount,  and  which  can  be  readily  collected. 

Fixed  capital  is  the  amount  of  the  authorized  capital 
stock  of  a  corporation. 

Quick  assets  are  cash,  and  whatever  can  be  readily  con- 
verted thereinto. 

Floating  liabilities  are  those  which  vary  from  time  to 
time,  such  as  notes  and  accounts  payable. 

Nominal  accounts  are  those  which  record  income  and 
expenditure,  as  distinguished  from  personal  and  real  ac- 
counts. 

Passive  assets — another  term  for  fixed  assets — those 
which  do  not  fluctuate  in  value  and  which  are  not  available 
as  working  capital. 

Passive  liabilities  are  such  items  as  capital  stock,  sur- 
plus, reserve  accounts,  etc. 

111.  In  making  up  a  business  statement  or  a  balance 
sheet,  why  are  the  assets  placed  as  debits  and  the  liabilities 
as  credits  ?  Are  there  any  exceptions  to  this  rule. 

The  assets  on  a  balance  sheet  appear  as  debits  because 
they  are  items  which  are  owing  to  the  business.  The  lia- 
bilities appear  as  credits  because  the  business  has  been 
trusted  with,  and  owes  these  items.  A  second  reason  is 
because  they  appear  this  way  in  the  ledger.  The  excep- 
tion is  the  English  form  of  balance  sheet,  where  this  order 
is  reversed;  the  liabilities  appearing  on  the  left  hand 


101 

side,  and  the  assets  on  the  right.  It  is  fair  to  add  that  the 
advocates  for  the  English  form  claim  that  the  balance  sheet 
is  not  an  account,  and  that  consequently  the  terms  debit 
and  credit  do  not  apply. 


Describe  the  entries  necessary  to  open  a  set  of 
double  entry  books  for  a  firm  just  starting  in  business. 

A  schedule  of  assets  and  liabilities  should  be  carefully 
prepared  and  each  partner  credited  with  the  amount  of 
capital  contributed  by  him.  The  journal  entry  would  be 
Sundry  Assets,  Dr.,  to  Sundry  Liabilities,  care  being  taken 
of  course  to  see  that  the  total  assets  exactly  equal  the  total 
liabilities,  including  capital  accounts.  The  items  should 
then  be  posted  in  the  ledger.  Such  nominal  accounts 
should  be  opened  as  might  be  necessary  to  record  sources 
of  income  and  expenditure  clearly,  and  finally,  a  trial  bal- 
ance should  be  taken  off  to  test  the  accuracy  of  the  posting. 

113.  In  closing  the  ledger  accounts  of  an  ordinary 
business  for  the  purpose  of  a  general  exhibit  of  affairs, 
what  order  should  be  observed? 

The  cash  should  first  receive  attention.  Cash  unde- 
posited  should  be  verified,  the  pass  book  balanced  and  a 
reconciliation  statement  prepared  showing  the  difference 
between  the  pass  book  balance  and  that  of  the  check  book. 
The  inventory  of  goods  on  hand  should  then  be  checked  as 
to  footings  and  extensions,  and  the  total  credited  to  mer- 
chandise account,  from  which  the  gross  profits  shown 
should  be  transferred  to  the  credit  of  profit  and  loss  ac- 


102 

count.  The  real  accounts  should  then  be  examined  and 
provision  be  made  for  depreciation  and  prepaid  charges. 
The  Bills  Receivable  and  Payable  accounts  should  be  ad- 
justed and  schedules  prepared.  The  customers  accounts 
should  next  be  gone  over  and  provision  made  for  doubtful 
debts,  discounts,  etc.,  by  means  of  a  reserve  account. 
Schedules  of  these  and  of  accounts  payable  should  be  made 
up,  profit  or  loss  credited  or  charged  to  capital  accounts, 
and  a  balance  sheet  drawn  up  in  proper  form.  It  is  taken 
for  granted  that  the  books  are  in  balance,  and  that  a  cor- 
rect trial  balance  has  been  furnished. 

114.  Define  and  differentiate  reserve  fund,  sinking 
fund,  depreciation,  surplus.  Classify  the  foregoing  as  as- 
sets or  liabilities  and  give  reasons  in  each  case.  Explain 
the  meaning  of  an  item  in  suspense. 

A  reserve  fund  is  a  portion  of  the  profits  set  aside  for  a 
specific  purpose  by  debiting  profit  and  loss  account  and 
crediting  reserve  fund  account.  While  the  credit  is  offset 
by  some  portion  of  the  assets,  when  a  "  fund "  is  desig- 
nated, it  should  consist  of  some  definite  investment. 

A  sinking  fund  is  a  fund  set  aside  out  of  the  assets,  in- 
vested and  accumulated  at  interest  for  the  purpose  of 
liquidating  a  certain  liability  at  some  specified  date. 

Depreciation  is  caused  by  wear  and  tear  of  usage,  etc. 
It  is  offset  by  crediting  the  items  subject  to  it  and  charging 
the  amounts  written  off  to  profit  and  loss  account. 

Surplus  is  the  amount  of  the  undistributed  profits  of  a 


103 

corporation.  Reserve  and  sinking  funds  are  both  assets, 
corresponding  to  the  amount  of  the  "  account "  they  repre- 
sent. Depreciation,  if  appearing  as  a  reserve  instead  of 
being  charged  to  profit  and  loss  is  a  liability.  Surplus  is 
a  liability  of  the  business  to  the  stockholders  for  profits 
earned  but  not  distributed. 

An  item  in  suspense  is  one  whose  realization  is  doubtful. 
A  customer  becomes  insolvent.  It  is  doubtful  how  much 
will  be  received  in  settlement  of  his  account.  Pending 
final  adjustment,  his  personal  account  should  be  credited 
and  suspense  account  debited  with  the  balance  due  by 
him.  The  amount  received  in  final  settlement  is  credited 
to  suspense  account,  and  the  balance  should  be  charged  to 
profit  and  loss  account. 

115.  What  is  understood  by  the  term  ne t  profit?    State 
the  final  disposition  of  net  profit  in  the  books  of  a  part- 
nership ;  of  a  corporation. 

Net  profit  is  the  surplus  remaining  over  from  the  em- 
ployment of  capital  after  all  expenses  and  outlays  con- 
nected with  its  use  have  been  defrayed.  In  the  books  of  a 
partnership  profit  is  credited  to  the  individual  capital  ac- 
counts of  the  partners  in  the  proportion  called  for  by  the 
articles  of  copartnership.  In  the  books  of  a  corporation 
profit  should  be  credited  to  surplus  account. 

116.  "What  is  a  stock  (or  shares)  ledger?    Explain  the 
nature  of  its  records  and  describe  the  maniier  in  which 
they  are  made.     What  relation  does  this  book  bear  to  the 
general  books  of  the  corporation  ? 


104 

A  stock  or  shares  ledger  is  designed  to  show  the  amount 
of  the  individual  holdings  of  the  stockholders  of  a  corpora- 
tion. The  original  holdings  are  posted  to  the  credit  of  in- 
dividual accounts  in  the  ledger  direct  from  the  stock  cer- 
tificate book.  Subsequent  purchases  or  sales  are  credited  or 
charged  to  individual  accounts  from  the  transfer  book. 
It  has  no  direct  connection  further  than  furnishing  the 
names  and  amounts  of  stock  held  by  individual  stock- 
holders; the  total  amount  to  the  credit  of  stockholders 
agreeing  with  the  amount  to  the  credit  of  capital  stock 
account  in  the  general  ledger. 

117.  Describe  and  illustrate  at  least  three  forms  of 
ledgers  adapted  to  customers'  accounts,  and  state  the  form 
you  prefer  for  some  specific  class  of  accounts. 

For  general  business  purposes,  the  ordinary  ledger  rul- 
ing is  found  convenient;  one  column  for  debits,  one  for 
credits.  For  retail  merchants  it  would  be  desirable  to 
have  two  debit  columns — one  to  contain  the  items,  and  the 
other  the  totals  of  bills,  and  one  credit  column.  This 
would  enable  the  bookkeeper  to  render  detailed  statements 
without  necessitating  recourse  to  the  sales  books. 

For  banks,  it  would  be  necessary  to  have  a  separate  col- 
umn to  show  the  daily  balances  of  customers.  So  three 
columns  should  be  provided:  One  for  deposits,  one  for 
withdrawals,  and  one  to  contain  the  amount  of  the  daily 
balances. 

118.  What  plan  would  you  suggest  for  recording  in 


106 

the  books  of  a  large  mercantile  firm  its  contingent  lia- 
bilities incurred  by  indorsements  on  bills  receivable  ? 

As  a  note  is  discounted  it  should  be  credited  in  bills 
receivable  account  through  the  cash  book,  opposite  the 
amount  of  the  charges,  and  the  letter  "  d  "  marked  against 
it.  When  paid  at  maturity,  the  "d"  should  be  marked 
through  with  red  ink. 

119.  What  distinction  would  you  make  in  an  ordinary 
set  of  books,  as  to  debits  to  the  merchandise  account;  in- 
cidental expenses  of  the  business;  losses  such  as  bad  debts, 
destruction  of  property,  etc.  ? 

Merchandise  account  should  be  debited  with  initial  in- 
ventory, with  purchases,  and  returns  by  customers.  In- 
cidental expenses  should  be  recorded  under  properly  clas- 
sified descriptive  accounts.  Bad  debts  should  be  charged 
to  profit  and  loss  account. 

Destruction  of  property  should  be  credited  to  its  proper 
account  and  charged  direct  to  capital  account. 

120.  Give  a  rule  for  averaging  an  account  not  yet  due, 
for  the  purpose  of  settling  by  note. 

Eule. — Fix  upon  any  one  of  the  various  dates  and  mul- 
tiply the  various  amounts  by  the  number  of  days  between 
this  date  and  the  dates  upon  which  the  sums  fall  due; 
divide  the  sum  of  these  products  by  the  sum  of  the  amounts, 
and  the  result  is  the  number  of  days  between  the  date 
fixed  upon  and  the  average  due  date.  (Lisle.) 


106 

Date, 

Amount 

Days  from 

Feb.  1st. 

Feb    1 

$250 

0 

March  21  .  . 

$  50 

48 

May  20.... 

$500 

108 

May  30.... 

$200 

118 

Product. 

$          0 

2,400 

54,000 

23,600 


$1,000  $80,000 


$80,000  divided  by  1,000  gives  80  days  from  February  let 
as  the  equated  time. 

121.  Into  what  general  classes  should  ledger  accounts 
be  divided?    State  the  distinguishing  feature  of  each  class 
Mention  one  account  belonging  to  each  class. 

Ledger  accounts  should  be  divided  into  two  general 
classes:  nominal  and  real.  The  distinguishing  feature  of 
each  class  is  that  while  the  former  is  periodically  closed 
out  into  the  Profit  and  Los  Account,  the  latter,  after  de- 
ductions for  depreciations,  reserves,  &c.,  appears  upon  the 
balance  sheet.  One  account  belonging  to  each  class:  Ex- 
pense Account,  nominal;  Plant  and  Machinery  Account, 
real. 

122.  State  a  comprehensive  general  rule  for  journaliz- 
ing.   Write  in  your  journal  the  entries  of  the  following 
transactions  and  explain  the  application  of  the  rule  to  each 
debit  and  credit:   You  receive  from  A.  Truman,  adminis- 
trator of  an  estate  of  which  you  are  a  legatee,  full  titles 
to  property  as  follows:  warehouse  on  Bond  st.  valued  at 
$175,000,  mortgaged  to  Ironclad  Trust  Co.  for  $18,000; 


107 

suburban  residence,  valued  at  $8,000;  100  shares  Tesla 
Electric  Co.,  par  value  $100  a  share.  Three  days  later 
you  convey  the  residence  as  a  gift  to  your  daughter. 

Every  item  charged  should  have  a  corresponding  amount 
credited.  If  an  amount  will  be  ultimately  received  it  should 
be  debited — it  is  an  asset.  If  it  will  not  be  received  it 
should  be  debited — it  is  an  expense.  If  an  item  will  have 
to  be  paid  it  should  be  credited — it  is  a  liability.  If  it  has 
not  to  be  paid  but  records  a  source  of  profit  it  should  be 
credited. 

Journal  entries  for  James  Lucky,  legatee : 

(a)  Real  Estate  Dr.  $175,000.00. 

To  James  Lucky  (capital  account),  $175,000.00. 

(Real  estate  is  an  asset  and  is  debited.  Capital  of  J.  L. 
is  credited  because  he  will  have  to  be  paid  this  amount.) 

(b)  James  Lucky  (capital  account)  Dr.,  $18,000.00. 

To  Ironclad  Trust  Co.,  $18,000.00 

(Here  J.  L.  is  debited  because  the  amount  will  be  even- 
tually received  from  him.  The  I.  T.  Co.  is  credited  because 
they  will  eventually  have  to  be  paid.) 

(c)  Real  Estate  Dr.,  $8,000.00. 

To  J.  L.  (capital  account),  $8,000.00. 
(Same  explanation  as  (a).) 

(d)  Investment  Account  Dr.,  $10,000.00. 

To  J.  L.  (capital  account),  $10,000.00. 

(Same  reason  as  (a).) 


108 

(e)  James  Lucky  (capital  account),  Dr.,  $8,000.00. 

To  Real  Estate,  $8,000.00. 

Residence  conveyed  by  J.  L.  to  his  daughter  as  a  gift  this 
day. 

(Here  J.  L.  is  charged  $8,000,  amount  of  real  estate; 
real  estate  being  made  less  is  credited.) 

123.  What  books  of  a  mercantile  firm  should  be  treated 
as  books  of  original  entry  and  be  posted  direct  to  the 
ledger?    Give  an  example  of  an  entry  that  should  neces- 
sarily be  made  in  the  journal. 

Cash  book,  sales  book,  purchase  book,  returns — credited 
to  customers,  and  charged  to  creditors,  bills  receivable  and 
payable  book. 

John  Brown   (capital  account)   Dr.  . . $2,500  00 
To  furniture  and  fixtures  account 2,500  00 

Damage  done  by  fire  in  store,  J.  B.  being  uninsured. 
This  is  a  direct  loss  of  capital. 

124.  State  the  different  steps  in  the  process  of  closing 
the  ledger  at  the  end  of  a  fiscal  period  and  give  the  reason 
for  each  step. 

The  inventory  having  been  taken,  it  is  credited  to  mer- 
chandise or  trading  account — the  excess  of  the  credit  side 
over  the  debit  shows  the  gross  profit,  which  is  charged  to  the 
account  and  credited  to  profit  and  loss.  As  the  inventory 
is  unsold  it  is  an  asset  and  is  brought  down  as  a  debit  bal- 


100 

ance.  In  order  to  determine  the  net  profit,  all  the  nominal 
accounts  with  debit  balances  are  charged  and  all  those  with 
credit  balances  are  credited  to  profit  and  loss.  Provision 
is  made  for  depreciation,  bad  debts,  interest  on  capital,  etc., 
by  charging  profit  and  loss  and  crediting  specific  reserve 
accounts.  The  excess  of  the  credit  balances  over  the  debit 
balances  is  the  amount  of  the  net  profit. 

125.  Explain  the  uses  and  relations  of  the  petty  cash 
book  to  the  principal  cash  book.  Rule  a  section  of  a  page 
of  an  analytic  petty  cash  book  for  a  jobbing  house  and 
make  five  illustrative  entries. 

The  petty  cash  book  should  be  used  only  to  record  pay- 
ments in  currency  of  non-ledger  accounts.  The  cashier 
should  draw  a  check  for  a  certain  amount — say  $50,  and 
charge  it  in  the  general  cash  book  to  "  office  cash  account." 
He  should  personally  enter  it  in  the  petty  cash  book.  As 
far  aa  possible  the  petty  cash  keeper  should  procure  vouch- 
ers for  all  his  expenditures  and  charge  each  item  under  its 
proper  column.  Monthly  he  should  foot  these  columns  and 
a  journal  entry  should  be  made  charging  the  expense  ac- 
counts indicated  and  crediting  "  office  cash  account  "- 
which  will  then  show  the  same  balance  as  that  appearing 
in  the  petty  cash  book.  The  advantages  of  this  system  are 
that  while  the  cashier  has  no  memoranda  to  carry,  nor 
bother  with  balancing  petty  cash,  the  balance  always 
appears  upon  the  ledger  as  an  asset,  and  is  in  no  danger  of 
being  overlooked. 


110 


DR. 


CR. 


1902 

Voucher 
No. 

Car 

Fares 

Tele- 
phones 

Postage 

Express 

Freight 

1902 

Aug.  6, 

$50.00 

1 
2 
3 
4 
5 

.10 

.35 

10.00 

1.30 

5.40 

Aug.     6 

8 
9 
10 

126.  What  is  the  purpose  of  a  trading  account,  and 
what  general  result  should  it  show  ?    In  closing  the  ledger 
what  disposition  should  be  made  of  the  balance  of  the  trad- 
ing account? 

The  purpose  of  ^trading  account  is  to  show  the  amount 
of  purchases,  sales,  returns  by  customers,  returns  to  cred- 
itors and  the  expenses  attending  same.  The  general  result 
shown  is  the  gross  profit  on  trading,  i.  e.,  the  excess  of  sale 
price  over  purchase  price  of  goods  actually  sold.  From  this 
the  percentage  of  gross  profit  is  determined.  The  balance 
of  the  trading  account  should  be  closed  out  into  profit  and 
loss  account. 

127.  Explain  the  theory  of  goodwill.     On  what  basis 
should  goodwill  be  valued  ?    Is  goodwill  a  fixed  or  a  float- 
ing asset?    Why? 

Goodwill  is  the  monetary  value  placed  upon  the  connec- 
tion and  reputation  of  a  mercantile  or  manufacturing  con- 
cern, and  discounts  the  value  of  the  turnover  of  a  business 
in  consequence  of  the  probabilities  of  the  old  customers 
continuing.  Probably  Lord  Eldon's  definition  is  as  good  as 


Ill 

any :  "  The  goodwill  of  a  trade  is  nothing  more  than  the 
probability  that  old  customers  will  resort  to  the  same 
place."  The  value  of  the  goodwill  of  a  business  depends 
upon  the  place,  the  name,  and  the  chance  that  no  one  con- 
nected with  the  old  firm  will  step  in  to  compete.  The 
basis  of  valuation  is  the  capitalized  value  of  the  net  earn- 
ings of  a  business  for  a  term  of  years.  Goodwill  is  a  fixed 
asset,  because  it  is  in  no  sense  available  as  working  capital. 

128.  Give  a  rule  for  adjusting  partners'  accounts  (a) 
when  the  gains  or  losses  are  to  be  divided  in  proportion  to 
each  partner's  investment  and  the  time  it  remains  in  use ; 
(b)  when  the  proportion  of  gain  or  loss  is" fixed  and  interest 
is  calculated  on  excess  or  deficit  of  capital. 

(a)  Assuming  that  profits  are  divided  annually,  deter- 
mine the  average  amount  invested  for  the  year  by  each 
partner,  add  the  amount  and  so  arrive  at  the  total  net  aver- 
age capital  invested  for  one  year.      Divide  this  into  the 
amount  of  profit  earned  and  the  quotient  will  be  the  per- 
centage of  profit.     Credit  each  partner  with  this  percentage 
upon  his  average  capital  invested  for  the  year  and  the 
profits  will  have  been  divided. 

(b)  Determine  the  average  investment  for  the  year  as 
before  and  charge  the  partner  who  has  a  deficit  with  inter- 
est on  half  the  excess  capital  kept  invested  by  his  co-partner 
and  credit  same  to  the  co-partner.     Then  divide  profit  or 
loss  in  proportion  stated  in  co-partnership  articles  of  agree- 
ment. 


112 

129.  What  books  besides  such  as  are  used  by  individuals 
or  firms  are  necessary  for  recording  the  transactions  of  an 
incorporated  company?    State  briefly  the  use  of  each  book 
mentioned. 

Minute  Book  to  contain  copy  of  articles  of  incorporation, 
bylaws,  and  minutes  of  directors'  and  stockholders'  meet- 
ings. Stock  certificate  book — the  stubs  of  which  really  con- 
stitute the  journal  of  the  stock  or  shares  ledger.  Transfer 
book — to  contain  a  record  of  all  stock  transferred  by  share- 
holders. Stock  or  shares  ledger  to  contain  the  individual 
accounts  of  stockkholders  and  to  show  the  number  of  shares 
held  by  each. 

130.  How  should  inventories  be  treated  in  closing  the 
ledger  at  the  end  of  a  fiscal  period?    Is  the  common  prac- 
tice of  adding  the  inventory  of  goods  on  hand  to  the  credit 
side  of  the  merchandise  account  theoretically  correct  ?  Ex- 
plain. 

They  should  be  credited  to  the  accounts  to  which  the 
purchases  were  charged;  brought  down  as  debit  balances, 
and  appear  upon  the  balance  sheet  amongst  the  assets. 

It  is  not  theoretically  correct  to  credit  the  merchandise 
account  with  the  inventory  at  the  end  of  a  fiscal  period. 
The  merchandise  account  should  show  the  actual  cost  of 
goods  sold  on  the  debit  side,  and  this  is  best  accomplished 
by  deducting  the  inventory  from  the  total  of  the  debits. 
While  the  same  result  is  accomplished  by  crediting  the 
inventory — i.  e.,  in  the  amount  of  gross  profit  shown — the 
actual  cost  of  goods  sold  is  not  apparent. 


113 

131.  Mention  four  items  of  infonnation  in  addition  to 
those  usually  shown  in  the  books  of  a  mercantile  business 
which  should  appear  in  a  set  of  books  for  keeping  the  ac- 
counts of  a  factory.     Give  reasons  for  your  answer. 

(a)  Wages  account  to  show  amount  paid  for  factory 
labor,  (b)  Materials  account  to  show  cost  and  consump- 
tion of  items  entering  into  cost  of  articles  manufactured. 

(c)  Plant  and  machinery  to  record  cost  of  same  and  of 
amount  written  off  for  depreciation — a  percentage  of  which 
contributes  to  the  cost  of  manufactured  goods,  (d)  Stores 
account  to  record  cost  of  items  which  incidentally  attend 
the  conduct  of  all  manufacturing  establishments. 

132.  What  class  of  expenditures  should  be  treated  as 
assets  at  the  close  of  a  fiscal  period. 

All  items  of  capital  expenditure  after  adequate  deduc- 
tions for  depreciation,  and  such  items  of  revenue  expendi- 
ture as  would  come  under  the  head  of  prepaid  charges,  &c. 

133.  Define  the  following  terms  as  used  in  factory 
accounting :  cost  of  production,  prime  cost,  general  charges, 
maintenance,  stores,  stock,  stock  debit  note,  storekeeper, 
writing  off. 

By  cost  of  production  is  meant  the  prime  cost  plus  shop 
establishment  and  general  establishment  expenses.  Prime 
cost  is  the  amount  expended  upon  raw  material  and  wages 
in  producing  a  given  article. 

General  charges  include  office  expenses  for  clerks,  sal- 
aries, stationery  and  all  other  expenses.  Maintenance  is  the 


114 

cost  of  repairing  plant  and  machinery,  buildings,  &c.,  and 
keeping  same  in  efficient  order.  Stores  are  those  items  en- 
tering into  cost  of  production  apart  from  prime  cost.  Stock 
is  the  amount  and  quantity  of  manufactured  goods  on  hand. 
Stock  debit  note  is  a  memorandum  given  to  the  stock  clerk 
charging  his  inventory  with  certain  quantities  of  manu- 
factured goods.  Storekeeper  is  the  title  applied  to  the  man 
who  takes  charge  of  general  stores  and  issues  same  on  requi- 
sition. "  Writing  off  "  is  a  term  applied  to  the  deductions 
made  for  depreciation  and  for  shrinkage  in  quantities  of 
raw  material,  &c. 

134.  What  is  meant  by  the  surplus,  or  surplus  fund,  of 
a  stock  company?    How  is  this  fund  formed?  What  is  its 
purpose  ? 

By  surplus  or  surplus  fund  is  meant  the  excess  of  assets 
over  all  liabilities — including  capital  stock  and  all  reserves. 
It  represents  undistributed  profits. 

The  fund  is  formed  by  periodically  setting  aside  a  por- 
tion of  the  net  profits  of  a  corporation. 

Its  purpose  is  to  strengthen  the  financial  position  of  a 
company  and  to  provide  an  unspecified  reserve  for  contin- 
gencies. 

135.  Describe  a  method  of  keeping  the  accounts  of  an 
executor  and  state  what  books  are  necessary  for  the  pur- 
pose. 

The  books  should  be  kept  by  double  entry.  They  should 
show  the  principal  of  the  estate,  which  includes  all  property 


116 

belonging  to  testator  at  time  of  death  after  payment  of  all 
debts  then  owing.  They  should  also  show  what  comprises 
the  income  of  the  estate,  its  sources,  and  disposition.  The 
books  necessary  are  cash  book,  journal,  ledger,  minute  book 
and  check  book.  On  the  first  page  of  the  journal  should  be 
entered  copies  of  the  will  and  inventory  of  the  estate  with 
date  of  filing.  The  "  estate  account "  should  be  credited  and 
the  various  "  asset  accounts  "  charged  with  the  items  com- 
prising the  inventory.  Every  transaction  should  be  passed 
through  the  journal  with  full  explanatory  notes,  so  that 
any  time  an  accounting  is  needed  full  particulars  as  to  in- 
come and  principal  receipts  and  disbursements  may  be 
readily  made  up,  and  so  that  at  the  final  accounting  the 
needed  schedules  and  summary  can  be  readily  constructed. 

136.  Explain  the  theory  of  double-entry  bookkeeping, 
and  state  the  principal  advantages  of  the  double  entry 
system. 

The  theory  of  double-entry  bookkeeping  is  best  ex- 
plained by  reference  to  the  exact  qualifying  words — double 
entry,  i.  e.}  a  twofold  entry.  In  this  system  every  amount 
is  entered  in  the  ledger  twice ;  once  on  the  debit  and  once  on 
the  credit  side ;  and  thus  the  ledger  is  kept  "  in  balance. " 

If  the  items  are  correctly  posted  the  total  amount  of  the 
debit  balances  will  exactly  equal  the  total  amount  of  the 
credit  balances.  Bookkeeping  is  simply  a  record  of  the 
transfer  of  money  or  money's  worth. 

In  double  entry  whatever  is  taken  from  one  account  is 


116 

transferred  to  another  so  that  a  twofold  record  is  made  of 
every  transaction.  The  principal  advantages  of  this  sys- 
tem are:  (a)  the  demonstrable  mathematical  accuracy 
of  the  posting  by  means  of  the  trial  balance;  (6)  the  classi- 
fication of  expense  accounts  so  that  revenue  and  capital  ex- 
penditure be  clearly  distinguished;  (c)  the  ability  to  as- 
certain gross  profit  through  the  trading  account;  (d)  the 
valuable  comparative  statistics  as  to  sources  of  income  and 
expenditure  which  can  be  readily  obtained  from  the  trial 
balance  monthly;  (e)  the  ability  to  ascertain  through  the 
Profit  and  Loss  Account  not  only  the  amount  of  net  profit, 
but  also  the  sources  from  which  the  profit  is  derived;  (/) 
the  ability  to  ascertain  not  only  the  profits  of  a  business  as 
a  whole,  but  also  the  profit  or  loss  of  every  department  sep- 
arately; (y)  the  confirmation  of  the  amount  of  profit  or 
loss  disclosed  by  the  Profit  and  Loss  Account  by  the  balance 
sheet  proper;  (h)  the  superior  facility  offered  for  rapid  and 
exhaustive  audit,  and  to  that  extent  acting  as  a  deterring 
factor  in  the  prevention  of  fraud. 

137.  Into  how  many  classes  are  ledger  accounts  usually 
divided?  Mention  two  of  the  principal  accounts  of  each 
class,  and  state  the  purpose  of  each. 

Ledger  accounts  are  broadly  divided  into  two  classes: 
personal  and  impersonal;  these  being  subdivided  into  real 
and  nominal.  Personal  accounts  are  those  kept  to  record 
transactions  with  debtors  and  creditors,  i.  e.,  those  to  whom 
goods  are  sold  and  from  whom  they  are  bought. 


117 

Real  accounts  contain  records  of  amounts  of  real  value — 
as  distinguished  from  those  of  fictitious  value. 

Real  Estate  Account  and  Plant  and  Machinery  Account 
would  be  two  very  familiar  examples.  Nominal  is  the  name 
given  to  that  class  of  accounts  which  closes  out  periodically 
into  the  Profit  and  Loss  Account.  They  simply  record 
expenditure  or  sources  of  income  under  classified  headings. 
Examples:  Commission  Account,  and  Interest  Account. 
Personal  accounts  are  used  to  charge  or  credit  firms  or  in- 
dividuals with  money  or  money's  worth. 

The  purpose  of  the  Real  Estate  Account  is  to  record 
amount  paid  for  property  and  any  additions  or  improve- 
ments which  increase  value.  It  is  credited  with  amounts 
received  from  sales  of  property  and  with  depreciation, 
Plant  and  Machinery  Account  is  to  contain  cost  of  these 
items  and  additions  made  to  same  from  time  to  time.  It  is 
credited  periodically  with  a  certain  percentage  for  depre- 
ciation in  value  caused  by  usage. 

Commission  Account  is  to  record  total  amount  paid  and 
received  for  commission  during  any  given  fiscal  period. 

Interest  Account  is  to  show  the  amount  of  income  and 
expenditure  under  this  heading. 

138.  Define  current  assets,  current  liabilities.  Give  two 
examples  of  each. 

The  term  current  literally  means  "  running,"  so  that  cur- 
rent assets  and  current  liabilities  may  be  defined  as  those 
which  are  actively  running. 


118 

Examples  of  current  assets  are  Accounts  and  Bills  Re- 
ceivable; of  current  liabilities  Accounts  and  Bills  Payable. 

139.  Define  capital,  nominal  capital,  subscribed  capital, 
paid  up  capital,  goodwill. 

Capital  in  its  broadest  sense  should  be  defined  as 
the  amount  of  money  or  money's  worth  embarked  in  an 
enterprise.  In  a  more  restricted  sense  it  may  be  stated  to 
be  the  excess  of  a  man's  assets  over  his  liabilities. 

Nominal  capital  is  nearly  synonymous  with  "author- 
ized "  capital ;  it  means  "  capital  in  name " — i.  e.,  the 
amount  stated  may,  or  may  not,  be  actually  paid  in.  Sub- 
scribed capital  is  the  amount  for  which  subscriptions  have 
been  secured  and  which  need  not  be  actually  paid  in  in 
full  at  the  time  of  application. 

Paid  up  capital  is  the  amount  of  capital  actually  paid  in 
as  distinguished  from  the  amount  of  capital  authorized. 

Goodwill  is  the  capitalized  value  of  the  net  earnings  of  a 
business  for  a  specified  term  of  years. 

140.  Define  the  following  terms:  balance   sheet,   re- 
serves, items  in  suspense,  surplus,  impairment. 

"Balance  Sheet"  is  an  exhibition  in  condensed  form 
of  all  the  assets  and  liabilities  of  a  business  after  all  nomi- 
nal accounts  have  been  closed  out  into  the  Revenue  Ac- 
count. 

"  Reserve  " — a  term  applied  to  portions  of  the  profit  of  a 
firm  or  a  corporation  set  aside  for  specific  purposes — i.  e., 
reserve  for  improvements,  reserve  for  depreciation,  &c. 


119 

"  Items  in  Suspense  "  are  those  accounts  whose  ultimate 
realization  or  liquidation  is  doubtful. 

"  Surplus  "  is  the  net  amount  of  undistributed  profits. 

"Impairment"  is  the  creation  of  deficiency  of  assets 
either  by  business  losses  or  by  the  payment  of  dividends 
when  no  surplus  exists  out  of  which  to  pay  them.  The  cap- 
ital of  a  corporation  is  supposed  to  be  kept  intact,  i.  e.,  the 
assets  must  equal  liabilities  and  capital  stock.  If  the  assets 
are  less,  a  deficiency  is  created  and  hence  the  capital  is  said 
to  be  impaired. 

141.  Describe  the  merchandise  account  and  its  use. 
State  how  it  should  be  used  in  (a)  a  jobbing  or  wholesale 
grocery  business,  (b)  a  department  store  such  as  that  of 
Wanamaker  or  of  Siegel-Cooper  Co.,  (c)  a  manufacturing 
firm  making  agricultural  implements. 

The  Merchandise  Account  is  usually  charged  with 
the  inventory  on  hand  at  the  beginning  of  a  fiscal  period, 
and  with  purchases,  and  returned  sales  during  the  period. 
It  is  credited  with  sales;  and  with  amounts  of  goods  re- 
turned to  creditors.  It  is  credited  with  inventory  at  the 
end  of  the  period  and  then  if  the  credit  side  exceed  the 
debit  side,  the  amount  of  the  excess  is  the  gross  profit  for 
the  period,  which  is  charged  to  Merchandise  Account,  and 
credited  to  Profit  and  Loss  Account. 

The  use  of  this  account  is  to  determine  the  amount  of  the 
gross  profit  of  a  business  for  any  particular  fiscal  period. 
^   (a)  In  a  wholesale  grocery  house  this  account  should  be 


120 

subdivided  so  as  to  show  the  gross  profit  or  loss  made  in  the 
sale  of  specific  items,  such  as  tea,  coffee,  flour,  canned 
goods,  etc.  An  account  should  be  opened  for  each  item, 
showing  purchases,  sales  and  costs  incidental  thereto.  Pe- 
riodically these  should  be  closed  out  into  the  general  Mer- 
chandise Account,  which  would  then  show  the  gross  profit 
on  the  whole  business. 

(b)  In  a  department  store  like  that  of  Wanamaker  the 
object  would  be  to  show  the  gross  and  net  profit  by  depart- 
ments, and  the  Merchandise  Account  should  be  divided  into 
as  many  classes  as  there  are  departments.      Silks,  linens, 
boots  and  shoes,  toys,  stationer)',  jewelry,  &c.,  each  account 
as  above  closing  out  into  the  general  Merchandise  Account. 

(c)  In  the  case  of  a  firm  making  agricultural  imple- 
ments, accounts  would  have  to  be  opened  for  the  various 
classes  of  goods  manufactured,  showing  cost  of  raw  ma- 
terial, labor  and  other  items  contributing  to  the  cost  of  the 
manufactured  article — all  closing  out  into  the  general  Mer- 
chandise Account. 

14:2.  Describe  the  process  of  changing  a  set  of  books 
from  single  to  double  entry.  Draft  an  example. 

The  most  expeditious  way  of  changing  a  set  of 
books  from  single  entry  into  double  entry  is  to  mle  off  all 
accounts  other  than  those  with  debtors  and  creditors;  to 
make  up  a  complete  list  of  all  other  assets  and  liabilities 
and  to  credit  the  excess  of  assets  over  liabilities  to  capital 
account — opening  at  the  same  time  such  nominal  accounts 


121 

as  may  be  necessary,  to  set  forth  the  transactions  of  the 
business  clearly  under  classified  headings.  Suppose  a 
schedule  of  accounts  be  taken  from  the  ledger  and  it  be 
found  that  accounts  receivable  amount  to  $10,500.00  and 
that  accounts  payable  amount  to  $3,465.26.  An  examina- 
tion discloses  the  fact  that  there  is  $18,626.25  in  the  bank, 
that  there  are  in  the  safe  $2,500.00  of  bills  receivable; 
that  the  plant,  etc.,  is  worth  $4;000.00;  and  the  inven- 
tory of  stock  $7,500.00.  It  is  found  that  there  are  bills  pay- 
able outstanding  for  $6,700.00.  The  journal  entry  would 
be: 

Sundries,  Dr. 

Accounts   receivable $10,500  00 

Cash 18,626  25 

Bills  Receivable  2,500  00 

Plant  and  machinery   . . .     4,000  00 
Merchandise  acc't    (stock)    7,500  00 

To  Sundries, 

Accounts  payable $3,465  26 

Bills  payable    6,700  00 

Capital  stock   32,960  99 

Accounts  receivable  and  payable  are  ticked  because  they 
are  already  posted.  The  ledger  will  now  be  "  in  balance  " 
and  such  expense  accounts,  &c.,  may  be  opened  as  are 
necessary. 

143.  What  is  the  purpose  of  a  private  ledger?  What 
accounts  are  usually  kept  in  the  private  ledger? 


122 

The  purpose  of  a  private  ledger  is  to  enable  the  principal 
of  a  firm  to  keep  such  information  as  he  deems  expe- 
dient private,  and  accessible  only  to  himself  or  his  con- 
fidential assistant.  By  it  he  is  also  able  to  control  the  gen- 
eral accuracy  of  the  general  trial  balance — by  keeping  in 
his  own  hands  the  balance  total  of  his  private  ledger — debit 
or  credit.  If  the  totals  handed  in  from  the  general  trial 
balance  are  incorrect  he  can  immediately  detect  same  by 
adding  the  total  of  his  own  ledger.  This  check  is  unfortu- 
nately too  often  overlooked.  The  accounts  usually  kept  in 
the  private  ledger  are  Capital  Account,  Profit  and  Loss 
Account,  and  Investment  Account ;  also  records  of  personal 
drawings,  and  salaries. 

144.  What  difference,  if  any,  should  be  made  between 
the  accounts  of  a  firm  and  the  accounts  of  a  corporation  in 
the  same  line  of  trade  and  doing  about  the  same  amount  of 
business  ?     Explain. 

None,  except  as  to  the  capital  stock  account,  which 
is  not  (as  in  a  firm)  increased  or  decreased  by  profit  or 
loss.  The  journal  of  a  corporation  should  always  contain 
specific  reference  to  the  minute  book  for  declarations  and 
payments  of  dividends,  terms  of  contracts,  &c. 

145.  In  preparing  accounts  for  a  manufacturing  com- 
pany, on  what  principle  should  expenses  be  divided  as  be- 
tween the  manufacturing  account  and  profit  and  loss? 
Give  examples. 

All  DIRECT  expense  incurred  in  the  actual  manufac- 


123 

ture  of  goods  should  be  charged  to  manufacturing  account 
as  contributing  to  cost.  General  expenses  and  expenses  at- 
tending sales  should  go  to  profit  and  loss.  Labor,  raw  ma- 
terials, freight  inwards,  fuel,  light,  depreciation  of  plant, 
&c.,  should  go  to  manufacturing  account.  Salaries,  print- 
ing and  stationery,  commission,  &c.,  should  go  to  profit  and 
loss. 

146.  In  designing  a  set  of  accounts  for  a  business,  how 
might  provision  be  made  for  a  constant  showing  of  the  ag- 
gregate sum  owing  by  customers  and  the  aggregate  sum 
owing  to  creditors,  without  the  necessity  of  preparing  a 
schedule  of  the  accounts  of  such  customers  and  creditors? 

By  constructing  controlling  accounts  in  the  general 
ledger  and  making  every  other  ledger  "self  balancing/' 
Take  first  the  "bought  ledger,"  which  should  contain  ac- 
counts with  creditors.  The  total  amount  of  purchases  cred- 
ited should  be  charged  to  an  account  opened  in  this  ledger 
— called  "  General  Ledger  Account,"  and  the  total  amount 
of  cash  charged  to  creditors  should  be  credited  to  it.  The 
ledger  will  balance  by  itself  and  the  debit  balance  of  the 
"  General  Ledger  Account "  will  make  a  continuous  show- 
ing of  the  aggregate  amount  due  to  creditors  without  the 
necessity  of  preparing  a  detailed  schedule.  The  same  prin- 
ciple should  also  be  applied  to  the  "  Sales  Ledger." 

147.  In  making  up  the  cost  accounts  on  goods  produced 
by  a  factory,  what  items  of  expenditure  are  to  be  consid- 
ered?   How  should  these  be  combined  to  show  the  actual 
cost  of  any  specified  product? 


124 


In  making  up  cost  accounts  of  goods  produced  by  a  fac- 
tory the  principal  items  of  expenditure  to  be  considered 
are:  (1)  raw  material;  (2)  labor.  In  addition  to  these: 
(3)  proportion  of  rent  of  factory ;  (4=)  light;  (5)  heat;  (6) 
power;  (7)  supervision;  (8)  depreciation  of  machinery; 
(9)  incidental  expenses. 

In  order  to  show  the  actual  cost  of  any  specified  product 
the  actual  cost  of  material  used  and  of  labor  expended  upon 
its  conversion  would  first  have  to  be  calculated  and  to  it 
should  be  added  the  proper  percentage  (based  upon  a  time 
calculation)  of  the  attendant  expenses  above  enumerated. 
These  would  scarcely  be  the  same  in  any  one  business,  but 
the  general  principle  would  be  identical. 

148.  Draft  a  form  of  cash  book  to  be  used  where  all 
receipts  are  deposited  in  bank  and  all  payments  are  made 
by  check.  Illustrate  the  use  of  this  book  by  three  or  more 
entries. 


DR.     CASH. 


CASH.    CR. 


Data 

U 

3* 

Re- 
ceipts 

Bank 

Date. 

Ck. 
No. 

f! 

'PV 
I  ment 

July  1 

To  Balance 

1000 

00 

! 

JulyS 

A.  B. 

64 

500 

00 

July  1 

L.  S. 

54 

52 

640 

00 

"     7 

J.  C. 

53 

250 

00 

750 

00 

S.  V. 

55 

57 

50 

00 

14      9 

S.  T. 

64 

450 

GO 

P.  R. 

56 

50 

700 

00 

On  the  debit  side  a  special  column  is  headed  "  Bank,"  to 
which  is  extended  the  total  amounts  of  first  column  as  de- 


135 

posited.  As  all  payments  are  made  by  check,  by  deducting 
the  total  of  the  credit  side  from  the  bank  column  total,  the 
bank  balance  is  ascertainable  at  any  time. 

149.  What  is  meant  by  a  consignment  account?   How 
should  a  consignment  account  be  stated  in  a  balance  sheet  ? 

A   consignment   account   records   the   amount   of   the     . 
temporary  transfer  of  the  custody  of  one  person's  goods 
to  another.     The  person  who  so  transfers  his  goods  is  called 
the  consignor ;  the  person  to  whom  they  are  transferred  the 
consignee.    The  consignor  credits  his  merchandise  account 
and  opens  an  account  with  consignee  to  whom  he  charges 
the  total  amount  of  goods  consigned.      The  account  is 
charged  with  the  expenses  and  credited  with  the  remit-    •/' 
tances— 1the  difference  showing  the  profit  or  loss  on  the  con- 
signment. 

In  a  balance  sheet  goods  on  consignment  should  be  stated 
as  such  and  on  no  account  should  appear  under  the  title  of 
Accounts  Receivable. 

150.  From  what  accounts  is  a  profit  and  loss  account 
prepared?    In  what  way  is  its  accuracy  proved? 

Profit  and  Loss  Account  is  prepared  from  the  Mer- 
chandise Account  and  the  various  nominal  accounts,  and 
should  include  such  charges  as  are  necessary  if  deducted 
from  the  value  of  the  assets,  e.  g.,  depreciation,  reserve  for 
bad  debts,  etc.  The  accuracy  of  the  Profit  and  Loss  Ac- 
count is  proved  by  the  balance  sheet,  which  arrives  at  the 
same  results  in  a  different  manner. 


126 

151.  Robinson  &  Co.,  wholesale  dealers  in  notions, 
whose  books  have  not  been  kept  by  double  entry,  wish  to 
improve  their  system  of  bookkeeping.  Write  a  brief  re- 
port, advocating  double  entry,  setting  forth  the  superiority 
of  that  method  generally,  and  showing  by  specific  refer- 
ences to  the  mode  of  bookkeeping  employed  by  them,  the 
advantages  that  will  accrue  from  the  change. 

MESSRS.  ROBINSON  &  Co., 
Dear  Sirs: 

In  accordance  with  your  request,  I  have  made  an  ex- 
amination of  your  books  for  the  year  ending  December 
31st,  1901,  and  beg  to  report  that  a  net  profit  of  $97,065.03 
has  been  earned  during  this  period,  in  support  of  which  I 
present  a  statement  of  resources  and  liabilities.  While 
the  various  schedules  have  been  made  up  with  great  care, 
and  while  I  can  vouch  for  the  accuracy  of  the  result  shown, 
the  confirmatory  proof  through  the  medium  of  the  profit 
and  loss  account  is  lacking,  because  the  various  nominal 
accounts  necessary  to  its  preparation  have  not  been  kept. 
For  this  and  other  reasons  set  forth  below,  I  strongly  advo- 
cate the  immediate  introduction  of  the  double  entry  sys- 
tem of  bookkeeping.  A  trading  account  will  be  opened, 
which,  when  the  inventory  is  taken,  will  show  the  amount 
of  gross  profit  earned — i.  e.,  the  excess  of  selling  price  over 
cost  price  of  goods  actually  sold.  The  percentage  of  gross 
profit  can  be  readily  seen,  and  any  considerable  fluctuation 
in  the  rate  from  year  to  year  noted.  Your  expenses  can 
be  divided  up  under  as  many  headings  as  may  be  necessary 


127 

to  afford  detailed  information;  and  with  columnar  cash 
books,  journals,  etc.,  the  mechanical  labor  of  posting  can 
be  reduced  to  a  minimum.  Inasmuch  as  every  amount  is 
entered  on  both  sides  of  the  ledger,  the  correctness  of  the 
posting  of  the  accounts  can  be  demonstrated  monthly  in  a 
trial  balance.  I  should  recommend  that  there  be  opened 
a  General  Ledger,  Purchase  Ledger  and  Sales  Ledger. 
Each  of  these  can  be  made  self-balancing,  and  the  opening 
of  controlling  accounts  in  the  general  ledger  will  enable  a 
financial  statement  to  be  readily  made  up  without  waiting 
for  the  schedule  of  accounts  from  the  other  ledgers.  By 
introducing  a  proper  system  of  internal  check  the  danger 
of  irregularities  will  be  greatly  reduced,  and  the  work  of 
the  auditor  considerably  lightened.  The  introduction  of 
this  system  would  only  be  a  matter  of  a  few  days'  work,  as 
the  details  can  be  carried  out  by  your  staff  under  by  super- 
vision. 

Yours  truly, 

C.  P.  A. 

152.  Your  suggestions  (see  question  I)  as  to  a  change 
of  method  having  been  approved  by  Robinson  &  Co.,  you 
have  been  instructed  to  make  the  change  at  the  close  of 
the  fiscal  year ;  state  in  detail  how  you  would  proceed  from 
start  to  point  of  proof. 

In  the  general  ledger  I  should  open  a  Cash  Account,  and 
debit  it  with  the  balance  on  hand  December  31st.  The 
Merchandise  Account  should  come  next,  being  charged  with 


128 

the  total  amount  of  inventory  at  that  date.  The  various 
real  accounts  should  then  be  opened,  each  one  being 
charged  with  the  amount  shown  on  the  balance  sheet. 
After  this,  such  nominal  accounts  should  be  opened  as 
would  be  necessary  to  afford  the  fullest  information  as  to 
sources  of  profit  and  loss.  Controlling  accounts  should 
then  be  opened,  containing  the  totals  due  by  debtors,  and 
due  to  creditors.  Finally,  the  capital  account  should  be 
credited  with  the  amount  shown  December  31st.  If  the 
posting  has  been  correctly  performed,  this  ledger  will  now 
balance  by  itself.  It  should  be  tested  by  actually  taking 
off  a  trial  balance.  The  Customers'  Ledger  (including  Bills 
Eeceivable  Account)  should  then  be  opened,  and  the  bal- 
ance due  by  each  customer  charged  to  him.  A  balance  ac- 
count should  then  be  opened  and  this  ledger  should  also 
balance  independently.  The  work  should  be  proved  by 
taking  off  a  trial  balance.  Lastly,  the  purchase  ledger 
should  be  opened  and  treated  in  the  same  way.  A  type- 
written list  of  instructions  should  be  handed  to  each  ledger 
keeper  and  the  system  of  handling  cash  and  collections 
should  receive  careful  attention.  A  proper  system  of 
vouchers  should  be  arranged  for,  and  also  a  proper  method 
for  handling  the  petty  cash.  Returned  merchandise  out- 
wards and  inwards,  should  have  separate  journals,  and 
supporting  vouchers  be  arranged  for  every  entry.  In  this 
way  the  following  results  have  been  provided  for:  Classi- 
fication, explicitness,  the  minimum  amount  of  posting,  and 
the  prevention  of  irregularities  on  the  part  of  employes. 


129 

153.  By  analysis  the  debit  side  of  merchandise  account 
shows  purchases  $60,000,  returns  to  us  $4,000,  entries  off- 
setting errors  in  sales  extensions  $2,000,  trade  discounts 
to  customers  $13,500,  balance  profit  $27,000;  the  credit 
side  shows  sales  $90,000,  returns  by  us  $5,000,  allowances 
to  us  $1,500,  inventory  at  close  of  year  $10,000.    Suggent 
such  change   in  the   method  of   recording  the   foreging 
statement  as  would  readily  show  (a)  net  amount  of  pur- 
chases, (b)  net  amount  of  sales,  (c)  percentage  of  profit. 

154.  State  generally  how  the  books  of  a  firm  doing  a 
manufacturing  business  would  differ  from  those  kept  by 
a  trading  concern  as  to  (a)  books  of  record,  (6)  ledger 
accounts. 

(a)  The  books  of  record  kept  by  a  firm  doing  a  manu- 
facturing business  would  differ  from  those  kept  by  a  trad- 
ing concern  because  a  proper  cost  system  should  be  kept 
enabling  the  exact  cost  of  each  article  manufactured  to  be 
readily  ascertained.  The  additional  books  required  would 
ordinarily  be,  the  record  for 

(1)  Raw  material  purchased,  quantity,  price,  quantity 
consumed,  inventory. 

(2)  Labor  or  Pay  Roll  books,  by  departments. 

(3)  Job  or  cost  account  books  to  record  quantity  of 
material  and  labor  consumed,  time  taken,  quantity  manu- 
factured, etc. 

(4)  Manufactured  Goods  book  to  contain:    Record  of 
goods  manufactured,  and  cost  price  of  same. 

(5)  Materials  and  Supplies,  to  enable  record  of  their 
use  to  be  kept,  and  a  check  maintained  upon  the  inventory. 


130 


Account  as  stated. 
Purchases    ....  $60,000.00 

Returns    4,000.00 

Sales  Errors   . .       2,000.00 

Discounts    13,500.00 

Profit 27,000.00 


Sales    $90,000.00 

Returns   5,000.00 

Allowances    .  .  1,500.00 

Inventory    . .  10,000.00 


$106,500.00  $106,500.00 

(a)  Net  amount  of  purchases: 

Purchases    $60,000.00     Returns    $5,000.00 

Allowances    1,500.00 

Net  amount  of 
purchases  .  . 


$60,000.00 

(&)  Net  amount  of  sales: 

Returns    $4,000.00      Sales 

Errors    2,000.00 

Discounts     13,500.00 

Net  amount  of  )    70^00.00 


,000.00 


j-    53,500.00 
$60,000.00 


,$90,000.00 


(c)  Percentage  of  profits : 
Purchases  (net)  $53,500.00     Sales  (net) 
Less  inventory..   10,000.00 


$90,000.00 


..$70,500.00 


Profit 


$43,500.00 
27,000.00 


$70,500.00 


$70,500.00 


705 

=  62  per  cent. 

435 


131 

(b)  With  regard  to  ledger  accounts  the  manufacturing 
firm  would  keep  in  addition  to  those  kept  by  a  trading 
concern. 

(1)  A  Manufacturing  Account  to  record  cost  of  goods 
manufactured. 

(2)  Labor  or  Pay  Roll  Account. 

(3)  Accounts  for  different  classes  of  raw  materials  and 
supplies  purchased. 

(4)  Plant  and  Machinery  Account. 

155.  What  differences  in  books  and  accounts  would 
exist  between  a  partnership  and  an  incorporated  company 
carrying  on  a  similar  business? 

A  corporation,  in  addition  to  the  usual  books  kept  by 
a  firm,  should  keep  a  stock,  or  shares,  ledger,  transfer 
book,  and  minute  book. 

As  to  accounts,  the  capital  of  a  corporation  does  not 
vary,  and  profits  earned  instead  of  being  credited  to  Capital 
Stock  Account  should  be  transferred  to  Surplus  Account. 
When  the  profit  is  distributed  in  the  form  of  dividends,  the 
total  amount  declared  should  be  charged  to  Surplus  Ac- 
count and  credited  to  Dividend  Account,  which  in  turn 
should  be  charged  with  the  amounts  of  checks  as  paid  out 
to  stockholders.  By  Surplus  Account  here,  is  meant  such 
undistributed  profits  as  are  not  required  to  be  kept  intact 
by  law. 

156.  State  the  scope  and  value  of  the  trial  balance.    In 
case  of  failure  to  prove,  how  would  you  proceed  to  locate 
the  difference? 


132 

The  trial  balance  is  an  extract  from  the  ledger,  of  bal- 
ances of  every  open  account.  If  the  debit  totals  equal  the 
credit  totals,  the  ledger  is  said  to  be  in  balance.  If  the 
accounts  be  properly  arranged  in  order,  as  soon  as  the  in- 
ventory is  supplied,  it  is  possible  to  make  up  a  balance 
sheet  or  financial  statement  expeditiously.  Per  se,  the 
trial  balance  only  demonstrates  one  fact,  i.  e.}  that  the 
amounts  have  been  correctly  posted.  It  is  quite  possible 
to  conceive  of  a  proper  trial  balance  with  every  amount 
posted  to  a  wrong  account.  The  correctness  of  the  items 
contained  in  the  accounts  must  always  be  a  matter  for  the 
auditor.  In  spite  of  the  trial  balance  the  bookkeeping 
may  be  full  of  technical  errors,  errors  of  principle,  and 
fraudulent  errors,  the  correction  or  detection  of  which  is 
obviously  the  duty  of  the  auditor.  Supposing  the  trial 
balance  does  not  prove,  the  ledger  footings  should  be  gone 
over,  the  balances  checked  on  to  the  trial  balance  sheets, 
and  the  totals  of  the  sheets  themselves  re-added.  The 
footings  of  the  books  of  original  entry  should  be  proved  and 
finally  the  postings  checked.  If  the  ledgers  are  divided 
up,  and  controlling  accounts  are  kept  in  the  general  ledger, 
the  work  can  be  materially  shortened,  inasmuch  as  the 
error  can  be  localized,  and  only  that  particular  ledger  be 
checked  wherein  the  mistake  has  been  made.  Even  where 
controlling  accounts  are  not  kept,  it  is  nearly  always  pos- 
sible to  construct  one,  so  as  to  find  out  exactly  where  the 
error  has  been  made.  There  are  various  "  Short  Cuts  " 
suggested — but  it  is  invariably  found  that  a  great  deal  of 


133 

time  is  wasted  in  applying  the  tests,  and  after  all  recourse 
is  perforce  finally  taken  to  the  good  old-fashioned  way  of 
"calling  over/' 

157.  The  building  of  an  insurance  corporation  valued 
at  $500,000  is  mortgaged  for  $300,000.    The  rental  value 
of  the  portion  occupied  by  the  corporation  is  $3,500  a  year, 
and  there  are  sixty  other  tenants  in  the  building.     Mention 
such  accounts  as  should  be  kept  and  state  the  class  of  trans- 
actions to  be  recorded  in  each.     In  what  manner  and  to 
what  extent  would  the  building  enterprise  be  included  in 
the  annual  financial  statement  of  the  corporation? 

A  "  Building  Account"  should  be  charged  with  $500,000 
and  a  Mortgage  Account  credited  with  $300,000.  A 
"  Building  Eevenue  Account "  should  be  opened  and  cred- 
ited with  $3,500  annually  as  rent  from  the  corporation,  and 
also  with  the  rents  of  the  sixty  other  tenants.  This  ac- 
count should  also  be  charged  with  all  fixed  charges  such  as 
interest  on  mortgage  and  taxes;  also  with  the  operating 
expenses  of  the  building.  The  next  revenue  should  be 
credited  periodically  to  the  General  Eevenue  Account  of 
the  corporation. 

In  the  annual  financial  statement  should  appear  $500,- 
000  as  an  asset;  $300,000  as  a  liability,  and  the  net  build- 
ing revenue  should  appear  as  a  separate  item  in  the  General 
Eevenue  Account. 

158.  Outline  a  statement  of  assets  and  liabilities  and 
an  annual  statement  of  operations  of  a  manufacturing 
corporation.      State  how  you  would  treat  each  of  the  fol- 


134 

lowing  items:  (a)  interest  paid  in  advance  not  fully 
earned,  (b)  insurance  unexpired,  (c)  interest  accrued,  (d) 
outlay  of  labor  and  material  on  goods  not  fully  manufac- 
tured, (e)  material  to  be  delivered  to  complete  contracts 
charged  up  in  full,  (/)  depreciation  of  plant,  (g)  pro- 
vision for  future  losses  on  present  outstandings. 

BALANCE  SHEET. 


ASSETS. 


Cash. 

Notes  Receivable. 

Accounts  Receivable. 

Inventory. 

Raw  Materials. 

Manufactured  Goods. 

Goods  in  Process  of  Manufacture. 

Plant  and  Machinery. 

Prepaid  Charges. 


LIABILITIES. 


Notes  Payable. 
Accounts   Payable. 

Reserve  for  . 

Capital  Stock. 
Surplus. 


(a)  Interest  paid  in  advance  not  earned  should  appear  as 
an  asset. 

(6)  Insurance  unexpired  should  appear  on  the  balance 
sheet  as  an  asset  under  the  head  of  prepaid  charges.  Only 
that  portion  which  has  actually  expired  should  be  charged 
to  profit  and  loss. 

(c)  Accrued  Interest  should  be  charged  to  profit  and 
loss,  and  credit  to  interest  accrued  accounts.      It  should 
appear  on  the  balance  sheet  as  a  liability. 

(d)  Outlay  of  labor  and  materials  on  goods  not  fully 


135 

manufactured  should  appear  as  such  in  the  inventory  at 
cost — appearing  on  the  balance  sheet  as  an  asset. 

(e)  Material  to  be  delivered  to  complete  contracts 
charged  up  in  full  should  be  charged  to  Manufacturing 
Account  and  either  deducted  from  the  inventory  or  appear 
on  the  balance  sheet  as  a  liability. 

(/)  Depreciation  of  plant  should  be  charged  to  profit 
and  loss  account,  and  credited  to  plant  account,  or  to 
depreciation  account. 

(g)  Provision  for  losses  on  present  outstandings  should 
be  made  by  charging  the  profit  and  loss  account  and  credit- 
ing reserve  for  bad  debts.  On  the  balance  sheet  the  amount 
reserved  may  appear  as  a  liability  or  may  be  deducted 
from  the  accounts  receivable. 

159.  Describe  the  following  accounts  and  state  where 
and  how  they  are  employed:  surplus,  goodwill,  treasury 
stock,  maintenance,  suspense,  dividend. 

Surplus  account  should  contain  the  undistributed  profits 
of  a  corporation.  When  the  amount  of  profit  is  arrived  at 
through  the  profit  and  loss  account,  it  should  be  charged  at 
once  to  profit  and  loss  account  and  credited  to  surplus  ac- 
count. In  the  case  of  monetary  corporations,  the  accumu- 
lation of  a  certain  surplus  is  obligatory  and  this  surplus 
must  be  preserved  intact,  not  being  available  for  dividends. 

Good  Will  is  the  capitalized  value  of  the  net  earnings  of 
a  business  for  a  number  of  years.  The  determination  of 


136 

its  value  is  of  importance  where  a  business  is  sold.  The 
amount  paid  for  it  would  figure  as  an  asset. 

Treasury  Stock  is  that  portion  of  the  capital  stock  of  a 
company  which  has  not  been  issued.  It  should  appear 
as  an  asset. 

Maintenance  is  the  term  applied  to  the  cost  of  keeping 
plant,  machinery,  roadbed,  rolling  stock,  etc.,  in  good  order. 

Suspense  is  an  account  opened  to  which  all  doubtful  ac- 
counts are  transferred.  If  a  client  becomes  insolvent,  his 
balance  should  at  once  be  transferred  to  this  account. 
When  final  settlement  is  made,  the  amount  received,  is 
credited  to  Suspense  Account  and  the  balance  transferred 
to  bad  debt  account. 

Dividend  Account  is  credited  with  the  total  amount  of 
dividend  declared,  and  charged  with  checks  sent  out  to 
stockholders  in  payment  of  same. 

160.  In  a  statement  of  a  railway  corporation,  what  is 
meant  by  fixed  charges,  funded  debt,  floating  indebtedness, 
maintenance  of  way,  maintenance  of  equipment  ? 

Fixed  charges  such  as  interest  on  bonds,  taxes,  etc.,  are 
a  first  charge  against  income  after  operating  expenses. 
They  recur  at  regular  intervals,  and  do  not  vary  materially 
in  amount. 

Funded  Debt  is  the  amount  of  the  bonded  indebtedness. 

Floating  indebtedness  is  all  other  forms  of  liability  of 
accounts  payable,  notes  payable,  etc. 


137 

Maintenance  of  way  is  the  cost  of  keeping  rails,  etc.,  in 
good  order. 

Maintenance  of  equipment  is  the  cost  of  keeping  sta- 
tions, rolling  stock,  etc.,  in  first-class  condition. 

161.  What  is  the  best  way  of  recording  customers'  notes 
so  that  the  true  condition  of  each  account  may  be  shown? 
What  is  the  most  approved  way  of  treating  the  note  re- 
ceivable account  (a)  in  the  ledger,  (b)  in  a  statement  of 
affairs  ? 

As  soon  as  a  note  is  received  from  a  customer  it  should 
be  entered  in  the  Bills  Eeceivable  book,  and  posted  at  once 
to  his  credit.  The  due  date  for  each  note  should  also  be 
noted  in  an  inner  column.  As  a  note  is  paid  the  due  date 
in  the  customer's  account  should  be  crossed  through  with 
red  ink.  By  the  adoption  of  this  plan,  the  aggregate 
amount  of  any  customer's  indebtedness  on  open  account, 
and  on  paper  can  be  readily  perceived. 

The  best  way  to  treat  the  note  receivable  account  in  tbe 
ledger  is  to  charge  each  note  singly  to  the  account,  insert- 
ing the  due  date  in  an  inner  column.  As  each  note  is 
paid,  the  amount  should  be  posted  opposite  the  charge.  By 
this  method  a  complete  schedule  will  be  constantly  main- 
tained, and  the  chances  of  error  materially  lessened. 

In  a  statement  of  affairs  notes  receivable  should  appear 
in  schedule  form,  giving  name  of  maker,  date,  and  due 
date.  If  notes  have  been  discounted  there  is  a  contingent 
liability  on  same,  and  such  notes  should  appear  amongst 
the  liabilities. 


138 

If  notes  have  been  endorsed  over  to  creditors  in  settle- 
ment of  accounts,  they  should  appear  under  the  heading 
of  contingent  liability. 

162.  Arrange  a  plan  for  keeping  a  private  ledger  with 
which  the  general  ledger  will  agree  and  yet  in  no  way  re- 
veal the  contents  of  the  private  ledger.   What  matters  are 
usually  recorded  in  the  private  ledger  ? 

The  totals  of  the  various  accounts  in  the  private  ledger 
should  be  added,  and  the  total  balance  of  all  the  accounts 
should  appear  as  one  item,  under  the  head  of  "  private 
ledger  "  in  the  general  trial  balance  effecting  a  complete 
proof. 

It  is  usual  to  keep  in  the  private  ledger,  profit  and  loss 
account,  capital  investment  account,  personal  drawings, 
loans  and  investments,  in  fact,  all  such  matters  as  are  de- 
sired to  be  kept  from  the  knowledge  of  the  general  office 
staff. 

163.  Suggest  one  or  more  plans  by  which  an  inven- 
tory may  be  corroborated  or  impeached. 

If  the  percentage  of  gross  profit  compared  with  former 
years,  as  shown  by  the  merchandise  or  trading  account  is 
considerably  greater  or  considerably  less,  there  is  a  prima 
facie  ground  for  impeaching  the  accuracy  of  the  inven- 
tory, unless  valid  reason  can  be  assigned  for  such  change. 
Supposing  there  is  a  very  marked  fluctuation  in  the  per- 
centage of  gross  profit — say  a  large  increase — the  inven- 


139 

tory  at  the  commencement  may  have  been  taken  at  too  lo\v 
a  figure,  or  that  taken  at  the  end  at  too  high  a  figure. 
Goods  may  have  been  returned  by  customers  which  have 
been  taken  into  stock,  and  have  not  been  credited  on  the 
books.  Again — merchandise  may  have  been  purchased, 
and  taken  into  stock,  which  has  not  been  credited  on  the 
books.  If  the  percentage  of  gross  profit  is  considerably  less 
— the  opposite  course  may  have  been  pursued,  or  the  firm 
may  have  been  robbed. 

164.  Describe  several  economies  in  accounting  made 
possible  by  the  introduction  of  special  columns  in  books  of 
original  entry. 

By  the  introduction  of  special  columns  in  books  of  origi- 
nal entry,  the  following  economies  in  accounting  are  made 
possible : 

(a)  Complete  and  exhaustive  analysis  of  income  and  ex- 
penditure under  classified  headings  is  obtainable  by  post- 
ing totals  instead  of  items. 

(b)  The  profit  or  loss  on  any  department  of  a  business 
can  be  shown  clearly. 

(c)  The  profit  or  loss  on  every  class  of  goods  manufac- 
tured or  sold  can  be  determined. 

(d)  By  means  of  a  voucher  record  system  the  necessity 
of  keeping  accounts  with  individual  creditors  is  entirely 
obviated. 

165.  State  the  full  procedure  leading  up  to  the  entry 
of  the  following  transactions  in  the  shares  of  a  corpora- 
tion, the  par  value  of  which  is  $100 : 


140 


April  5,  1901.  James  Williamson  receives  certificate 
No.  75  for  100  shares  full  paid. 

May  3,  1901.  James  Williamson  requests  a  transfer  to 
George  T.  Jenkins  of  30  of  his  100  shares. 

Outline  a  form  of  stockholders'  ledger  and  properly  enter 
the  above  items  therein. 

CASH  BOOK. 
Dr. 
1901. 

April  15.     Jamee  Williamson,  subscription  a/c.,  $10,000. 
This  should  be  credited  to  Subscription  Account,  and 
James  Williamson  would  then  receive  his  certificate  for 
100  shares. 


DR. 


JAMES  WILLIAMSON. 


CR. 


Date 

Certificate 

*OJ3 

I* 

Par 

Value 

Date 

Certificate 

J! 

Par 
Value 

1901 
May 

;?" 

3 

Renewed 
by  80 
Transfdto 
G.  T.Jen- 
kins     81 

70 
30 

7000 
3000 

00 
00 

1901 
April 

May 

0 

3 

No.  75 
No.  80 

100 

10000 

70 

7000 

DR. 


GEORGE  T.  JENKINS. 


CR. 


-  g 

s 

Date 

Certificate 

0  C3 
OGQ 

Par 

Value 

Date 

Certificate 

•sj 

OOQ 

Par 

Value 

1901 

May 

0 

No.  81 

30 

3000 

141 

166.  On  what  general  principles  is  double-entry  book- 
keeping based?     State  briefly  a  general  formula  for  the 
correct  recording  of  business  transactions. 

The  general  principles  on  which  double-entry-bookkeep- 
ing is  based  are:  (a)  That  as  every  transaction  involves 
a  transfer  of  money  or  money's  worth,  every  entry  must  be 
made  twice — once  on  the  debit  and  once  on  the  credit  side 
of  the  ledger,  (b)  That  the  records  of  profit  or  loss  dis- 
closed in  the  nominal  accounts  must  be  confirmed  by  the 
increase  or  decrease  over  liabilities  exhibited  in  the 
balance  sheet,  (c)  That  as  a  result  the  total  debits  in  the 
ledger  should  always  equal  the  total  amounts  of  the  credits 
— the  proof  of  which  is  demonstrated  in  the  trial  balance. 
A  general  formula  for  the  correct  recording  of  business 
transactions  would  be :  Whenever  an  asset  is  created  or  an 
item  of  expense  is  to  be  recorded^ debit;  whenever  a  lia- 
bility is  created  or  an  item  of  profit  or  income  to  be  re- 
corded, credit. 

167.  Two  persons  exchange  with  each  other  their  re- 
spective notes  for  $1,000  each;  what  would  be  presumably 
the  object  of  such  exchange?    What  is  the  risk  and  the 
limit  (in  amount)  of  risk  of  each  party  to  the  transaction? 
How  should  such  a  transaction  be  recorded? 

The  exchange  would  presumably  be  for  the  benefit  of 
one  party,  but  might  be  for  both.  A,  being  short  of  cash 
asks  B  for  an  accommodation  note  of  $1,000,  payable  in 
thirty  days,  and  gives  him  his  own  note  for  the  same 


142 

amount,  payable  on  the  same  date.  A  endorses  B's  note 
and  discounts  same  at  his  bank.  If  B  fails  to  pay  the 
note  at  maturity,  A  must  pay  it,  i.  e.,  he  must  repay  out  of 
his  own  pocket  the  $1,000  he  received  from  the  bank.  If 
B  has  discounted  A's  note  and  cannot  repay  A,  A  must 
pay  the  $1,000.  The  limit  in  amount  of  each  party  is 
$1,000.  A's  books :  Bills  Receivable,  Dr.  $1,000  To  Bills 
Payable  $1,000,  with  full  explanatory  notes  would  record 
the  transaction  properly. 

168.  A  retail  bookstore  agrees  to  deliver  certain  sets  of 
books  at  $20,  on  payment  of  $2  down,  the  purchaser  agree- 
ing to  make  $3  payments  for  each  of  the  six  months  next 
following.  It  is  expected  that  sales  on  this  plan  will  ag- 
gregate several  hundred  sets.  Suggest  a  method  of  keep- 
ing the  accounts,  so  that  results  may  be  readily  shown. 

Enter  every  contract  ^for  $20,  as  received  in  a  sales  book 
ruled  with  seven  columns.  In  the  first  column  charge  $2 
to  each  customer.  Open  a  sales  ledger,  charge  each  cus- 
tomer from  sales  book  and  credit,  at  end  of  month  the  total 
of  the  column  to  a  "  general  ledger  account/'  Have  a  col- 
umn for  these  receipts  in  the  cash  book  and  enter  amounts 
received.  Credit  to  each  customer  in  sales  ledger  and 
charge  total  at  end  of  month  to  "  general  ledger  account." 
Sales  ledger  will  then  be  self  balancing. 

The  total  number  of  contracts  received  multiplied  by  $20 
should  be  credited  monthly  to  merchandise  account  in  the 
General  Ledger  and  charged  to  a  Subscription  Account. 
This  latter  should  monthly  be  credited  with  the  total  in- 


143 

stallments  charged  in  sales  ledger  through  sales  book  and 
charged  to  a  "  Subscription  Ledger  controlling  account." 
Total  cash  received  monthly  should  be  credited  to  con- 
trolling account,  which  would  then  show  monthly  amount 
due  for  subscriptions  in  the  sales  ledger,  while  the  Sub- 
scription Account  would  show  the  balance  of  amounts  sold 
on  contracts,  but  uncharged  to  customers,  because  not  due. 

169.  Give  all  the  stages  in  closing  the  books  of  a  mer- 
cantile corporation  from  the  time  they  are  fully  posted  to 
the  completion  of  the  financial  statement. 

(a)  Credit  inventory  to  merchandise  account. 

(&)  From  this  account  determine  amount  of  gross  profit. 
Charge  the  account  and  credit  profit  and  loss  with  the 
amount  of  gross  profit  and  bring  down  the  inventory.  The 
merchandise  account  being  at  rest,  will  now  be  a  real  ac- 
count. 

(c)  Charge  profit  and  loss  account  and  credit  nominal 
accounts  with  debit  balances ;  charge  nominal  accounts  with 
credit  balances  and  credit  profit  and  loss. 

(d)  Examine  all  real  accounts  and  charge  off  an  ade- 
quate percentage  for  depreciation  from  all  subject  to  wear 
and  tear. 

(e)  Examine  the  accounts  receivable;  close  out  those 
that  are  uncollectable  and  create  a  sufficient  reserve  for 
bad  debts. 

(/)  Charge  profit  and  loss  and  create  reserves  for  dis- 
counts, etc. 


144 

(g)   Credit  surplus  account  and  charge  profit  and  loss 
with  the  net  profit  and  show  same  on  balance  sheet. 

170.  Describe  several  methods  of  recording  discounts  on 
accounts  as  paid,  avoiding  misstatement  of  receipts  and 
disbursements.      State  the  advantages  or  disadvantages  of 
the  methods  proposed. 

(a)  Credit  cash  received  in  one  column  of  cash  book  and 
discount  allowed  in  another.     Post 'same  into  ledger  sep- 
arately.   This  will  serve  as  a  check  on  any  cash  being  appro- 
priated and  discount  made  to  cover  the  defalcation. 

(b)  Credit  both  cash  and  discount  as  before  and  post 
the  total  from  a  third  column  of  cash  book  to  which  the 
totals  of  cash  and  discounts  are  carried.     This  lessens  the 
amount  of  posting — but  as  both  items  appear  under  one 
title  in  ledger  as  "  Sundries  " — the  check  in  method  (a)  is 
wanting. 

(c)  Treat  discount  as  cash  by  crediting  total  amount  of 
cash  and  discount  as  cash,  and  crediting  each  with  discount 
on  the  opposite  side.     This  also  shortens  the  work — but 
does  not  record  actual  facts — as  the  amount  credited  to  the 
customer  was  not  received  as  posted. 

(d)  Another  method  is  to  pass  all  discounts  through  the 
journal.     But  this  doubles  the  work  and  only  accomplishes 
the  result^shown  in  method  (a)  which  is  recommended  as 
the  best. 

171.  Outline  an  entry  recording  bond  interest  due  but 
not  paid  at  time  of  making  the  entry.    What  are  the  ad- 
vantages of  such  an  entry? 


145 

Accrued  Interest,  Dr. 

To  Interest  act. 

The  advantage  of  the  entry  is  this :  That  as  the  balance 
sheet  is  designed  to  show  the  state  of  affairs  of  a  business  at 
a  given  moment  of  time,  all  assets  should  appear,  and  all 
income  applicable  to  the  period  covered  by  the  balance  sheet 
should  be  taken  credit  for. 

172.  Mention  other  items  which  could  be  treated  in  a 
way  similar  to  that  suggested  for  interest  in  question  6  and 
state  the  advantages  of  such  treatment. 

Interest  on  loans  accrued  but  unpaid,  prepaid  taxes,  in- 
surance, etc.,  should  be  treated  similarly  and  for  the  same 
reason. 

173.  Give  several  methods  of  keeping  the  records  of 
petty  accounts  and  accounts  with  infrequent  customers. 

One  method  would  necessitate  keeping  a  petty  ledger. 
The  books  of  original  entry  should  each  have  a  special  col- 
umn allotted  to  this  ledger,  and  a  petty  ledger  controlling 
account  could  be  opened  in  the  general  ledger  which  would 
show  the  aggregate  amount  due  by  customers  in  the  Petty 
Ledger.  This  would  greatly  expedite  the  taking  off  of  a 
trial  balance.  A  second  way  would  be  to  have  the  first 
few  pages  of  the  customers'  ledger  alphabetically  indexed. 
Charge  each  customer  under  index  letter  on  one  line  and 
credit  cash  as  received  on  the  same  line  on  the  opposite 
side.  Creditors'  accounts  could  be  kept  in  the  same  way. 


146 

The  third  method  would  be  the  voucher  system,  which 
might  be  adapted  for  both  charges  to  infrequent  customers 
and  small  purchase  accounts. 

174.  What  should  be  the  procedure  in  stating  the  value 
of  stock  on  hand  at  the  time  of  a  fire,  the  financial  books 
being  intact  and  showing  the  amount  of  an  inventory  taken 
four  months  previous  to  the  fire? 

The  procedure  would  be  the  same  as  is  customarily 
adopted  when  it  is  desirable  to  arrive  at  the  amount  of  the 
inventory  without  taking  stock.  In  this  case  find  out  the 
average  gross  profit  for  several  years  on  sales.  Those  for 
the  four  months  in  question  will  be  on  record,  and  the 
amount  will  contain  purchase  price  plus  the  average  per- 
centage of  gross  profit.  Divide  total  sales  by  one  hun- 
dred plus  the  ascertained  percentage,  and  the  quotient  will 
give  cost  price  of  goods  actually  sold.  Deduct  this  from 
the  inventory  at  commencement  of  the  period  plus  the  pur- 
chases for  the  four  months,  and  the  difference  will  be  the 
value  of  stock  on  hand  at  the  time  of  the  fire. 

175.  Give  cases  where  it  is  proper  to  include  in  a  state- 
ment of  assets  and  liabilities  certain  receipts  and  disburse- 
ments not  occurring  in  the  period  under  review. 

If  by  "  receipts  and  disbursements  "  is  means  actual  pay- 
ments and  receipts  of  cash,  it  is  difficult  to  see  how  they 
could  appear  in  a  statement  of  assets  and  liabilities.  They 
must  have  occurred  prior  to,  or  subsequent  to  the  making 
up  of  the  statement;  and  they  would  certainly  have  no 


147 

place  as  such  in  a  balance  sheet.  But  if  what  is  meant  is 
"income  and  expenditure/'  then,  as  to  expenditure — pre- 
paid charges  not  applicable  to  the  period  under  review 
might  appear  as  assets:  e.  g.,  taxes  and  insurance.  As  to 
income:  items  due,  but  not  received  could  also  appear  as 
assets — e.  g.,  interest  on  investments.  On  the  other  hand, 
as  liabilities  might  appear,  items  due  but  unpaid. 

176.  On  what  are  the  accounts  of  an  executor  based  ?  In 
preparing  his  account,  with  what  does  the  executor  charge 
himself  and  for  what  does  he  claim  credit? 

The  accounts  of  an  executor  are  based  upon  the  inven- 
tory filed  by  him  containing  the  appraised  value  of  the 
property  he  administers. 

He  charges  himself  with  Principal  as  per  inventory; 
with  any  accretions  thereto;  and  with  the  income  of  the 
estate  up  to  the  date  of  his  accounting.  He  credits  him- 
self, as  to  principal,  with  any  expenditure  directly  charge- 
able against  it  such  as  funeral  expenses,  inheritance  tax, 
and  expenses  attending  the  care  of  the  estate.  As  to  in- 
come, he  credits  himself  with  all  other  expenditures. 

177.  How  should  entries  be  made  of  notes  receivable  in 
the  account  of  a  customer  whose  credit  is  limited  to  a  fixed 
maximum,  so  that  his  account  will  show  at  all  times  the 
amount  for  which  his  order  may  be  accepted? 

All  notes  as  received  should  be  credited  to  him — being 
posted  in  the  ledger  account  in  red  ink.  When  paid,  a 
black  mark  X  should  be  placed  against  the  entry.  The 


148 

amounts  in  red  ink  added  to  the  debit  balance  of  the  ac- 
count will  at  all  times  show  his  indebtedness.  A  special 
note  credit  account  might  be  opened  instead,  but  it  is 
believed  that  the  first  method  is  simpler  and  achieves  the 
same  result. 

178.  How  should  entries  be  made  of  the  discount  at 
the  bank  of  notes  received  under  circumstances  outlined 
in  question  177?    What  entry  should  be  made  as  the  notes 
are  paid  at  maturity  ? 

Notes  as  received  should  be  debited  to  Bills  Eeceivable 
Account,  with  name  of  the  customer  and  due  date.  When 
the  note  is  discounted  at  the  bank  the  cash  should  be  cred- 
ited to  Bills  Receivable  Account  on  the  same  line  and  the 
cash  marked  in  red  ink  "  d."  When  the  note  is  paid  at 
maturity  a  black  ink  mark  should  be  made  through  it. 
By  this  method  the  total  amount  of  contingent  liability  on 
notes  discounted  by  a  firm  can  be  ascertained  in  a  few 
minutes.  It  also  obviates  the  necessity  of  opening  contin- 
gent liability  ledger  account. 

179.  State  cases  where  the  condition  known  as  "di- 
minishing assets  "  is  likely  to  arise.  How  should  such  cases 
be  treated? 

All  assets  which  are  subject  to  wear  and  tear  diminish 
in  value,  e.  g.}  plant  and  machinery,  furniture,  fixtures, 
etc.,  and  this  is  provided  for  by  writing  off.  as  depreciation, 
and  charging  to  profit  and  loss  account  such  an  amount 


149 

periodically  as  will  after  a  given  time  leave  the  residual 
or  break  up  value.  Such  cases  should  be  treated  by  writ- 
ing off  -the  customary  percentage  for  depreciation  period- 
ically until  the  residual  value  is  arrived  at.  This  can  be 
done  in  two  ways :  ( 1 )  by  writing  off  a  fixed  percentage 
of  the  original  cost  periodically  until  the  residual  value  is 
reached.  In  this  instance  a  lighter  rate  is  sufficient  than 
when  depreciation  is  calculated  on  a  diminishing  value; 
(2)  by  writing  off  a  fixed  percentage  off  the  diminishing 
value.  Here,  the  percentage  will  be  lighter  from  year  to 
year,  but  the  offset  is  that  the  expense  of  repairs  will  be 
greater. 

180.  You  are  called  on  to  assume  the  duties  of  general 
clerk  and  bookkeeper  in  an  establishment  where  the  ac- 
counting has  been  very  meagre  and  primitive;  state  the 
steps  that  you  would  take  to  reform  existing  conditions. 

The  cash  on  hand  should  be  counted  and  the  pass  book 
sent  to  the  bank  to  be  balanced.  An  inventory  should  be 
taken  of  stock  and  complete  schedules  of  all  assets  and  lia- 
bilities should  be  prepared  from  the  books,  bills,  letters, 
etc.  A  balance  sheet  should  next  be  prepared  and  a  new 
set  of  books  opened  to  record  all  transactions  by  double 
entry.  The  work  should  be  laid  out  for  the  clerks  in  sys- 
tematic order,  and  such  original  books  of  entry  provided 
as  would  insure  the  accurate  entry  of  all  transactions — so 
as  to  afford  the  fullest  detailed  information  with  a  mini- 
mum expenditure  of  labor. 


150 

181.  Write  from  memory  the  form  of  a  bond 
coupon.  For  what  purpose  are  such  coupons  employed  and 
how  are  they  used?  Describe  a  plan  for  the  care  of  paid 
coupons  and  give  reasons  for  the  use  of  such  a  plan. 

Form: 


On  the  first  day  of  February,  1912,  upon  surren- 
der of  this  coupon,  The  Company 

will  pay  to  bearer  Thirty  Dollars  ($30.00)  in  gold 
coin  of  the  United  States,  being  six  months'  in- 
terest then  due  on  its  coupon  bond. 
No.-  JOHN  BROWN, 

Treasurer. 


Such  coupons  are  virtually  promissory  notes,  evidencing 
the  indebtedness  of  the  corporation  issuing  the  bonds  for 
the  payment  of  a  specified  amount  of  interest  periodically 
at  a  certain  definite  place.  As  a  coupon  falls  due  it  is 
detached  from  the  bond  and  deposited  in  the  holder's  bank 
for  collection  just  like  an  ordinary  check. 

Coupons  when  paid  are  returned  to  the  corporation. 
They  should  be  punched  and  pasted  into  a  coupon  book 
ruled  with  as  many  spaces  on  each  page  as  there  are 
coupons  attached  to  a  bond.  The  "punching"  would 
prevent  their  repayment  if  lost  or  stolen;  the  pasting  then 
in  book  would  facilitate  reference  and  record  coupons  paid, 
and  due  but  unpaid. 

182.  What  is  a  contingent  liability?  Give  three  ex- 
amples. For  what  purpose  and  in  what  form  should  such 
liabilities  appear  in  a  financial  statement? 


151 

A  contingent  liability  is  one  which  may  become 
an  actual  one  in  the  event  of  a  certain  occurrence.  (1) 
When  a  merchant  discounts  a  customer's  note  at  a  bank, 
in  the  event  of  its  not  being  paid  at  maturity,  the  mer- 
chant has  to  take  it  up.  The  note  discounted  is  a  con- 
tingent liability. 

(2)  Arrears  of  cumulative  preferred  dividends:  here 
if  sufficient  profit  has  not  been  earned  in  one  fiscal  period 
it  must  be  paid  (if  earned)  in  succeeding  ones — i.  e.f  the 
dividend  is  a  contingent  liability — the  contingency  being 
the  earnings  being  sufficient  to  pay. 

(3)  Disputed  claims:  in  this  case  should  there  be  reason 
to  suppose  that  any  portion  will  become  absolute  and  have 
to  be  paid,  provision  for  estimated  amount  by  establish- 
ing a  contingent  liability  account. 

Cases  one  and  two  would  be  noted  at  the  foot  of  a  finan- 
cial statement;  case  three  would  appear  on  the  balance 
sheet. 

183.  Define  the  following  terms  as  relating  to  munic- 
ipal corporations,  and  outline  transactions  that  would 
necessitate  debits  and  credits  in  each  case:  (a)  appropri- 
ation accounts,  (&)  assessment  accounts,  (c)  bond  accounts, 
(d)  trust  funds. 

(a)  Accounts  set  aside  from  general  tax  revenues  for 
specific  purposes ;  e.  g.,  police  department,  fire  department, 
&c. 

(1)  Amounts  assessed  or  charged  to  individuals  for 


153 

the  performance  of  certain  work  by  which  the  property 
of  parties  assessed  is  benefited. 

(c)  Bond  accounts  are  designed  to  set  forth  total  indebt- 
edness of  a  municipality  for  money  borrowed  on  which 
bonds  have  been  issued  in  evidence. 

(d)  Trust  funds  are  monies  invested  under  the  control 
of  parties  generally  designated  "  sinking  fund   commis- 


184.  Distinguish    between   artificial   profits   and   real 
profits.      Give  examples  of  each. 

Real  profits  are  those  made  in  the  ordinary  way  of  busi- 
ness: e.  g.,  trading — the  real  profit  being  excess  of  selling 
price  over  cost  plus  expenses.  Artificial  profits  are  made 
as  it  were  "ab  extra  " ;  e.  g.,  real  estate  standing  on  books 
at  cost  value  $5000— sold  for  $10,000.  The  $5000  excess 
of  sale  price  over  purchase  price  is  an  artificial  profit. 

185.  What   are   secret   reserves?     Show   at  least  two 
instances,,  illustrating  the  reasons  for  their  creation  and  the 
methods  of  establishing  them. 

Secret  reserves  are  excess  of  assets  valuation  over  what 
appears  on  the  books  as  such.  Take  the  case  of  a  bank 
owning  its  own  building  and  site.  The  value  appears  on 
the  books  at  cost  (20  years  ago) ;  the  present  appraised 
value  is  fifty  times  the  cost  value.  The  excess  of  the  present 
value  over  cost  constitutes  a  secret  reserve;  for  the  in- 
creased value  might  be  written  up  and  a  corresponding  sur- 


153 

plus  created.  This  reserve  is  self-established  by  accretion 
of  value.  A  second  case  would  be  where  excessive  de- 
preciation has  been  written  off  plant,  &c. — the  book  value 
is  thus  less  than  real  value  and  a  secret  reserve  is  thus 
created.  Such  a  reserve  would  be  established  for  con- 
tingencies. 

186.  An  inventory  of  a  going  concern,  taken  under  your 
supervision  and  direction  and  requiring  two  weeks  to  com- 
plete, is  commenced  one  week  prior  to  the  close  of  the  fiscal 
period  under  review.  How  would  you  instruct,  as  to  (a) 
the  general  care  and  custody  of  stock  under  inventory,  (6) 
the  recording  of  incoming  and  outgoing  goods  during 
stock  taking  ? 

(a)  Stock  going  out  prior  to  completion  to  be  handled 
as  usual — stock  going  out  one  week  after  to  be  specially  re- 
corded. 

(&)  The  record  of  incoming  and  outgoing  goods  during 
stock-taking  is  explained  above.  The  second  week's  pur- 
chases should  be  kept  distinct  from  general  stock  book 
entries. 

187.  Describe  a  method  of  recording  periodically  the 
losses  of  a  corporation  with  a  view  to  preventing  the  pay- 
ment of  dividends  till  profits  subsequently  earned  make 
dividends  legal. 

The  losses  of  a  corporation  should  be  charged  against 
surplus  account  (if  one  exists) ;  if  not,  to  Deficiency  Ac- 
count. No  dividends  could  then  be  legally  paid  until  the 


154 

profits  subsequently  earned  amounted  to  enough  to  wipe 
out  the  deficit  and  to  create  a  surplus  sufficiently  large 
to  make  dividends  legal  and  warrant  (in  the  estimation) 
of  the  directors)  their  payment. 

188.  In  valuing  for  inventory  should  such  items  as  rent, 
interest,  insurance,  salaries  and  expenses  of  management 
ever  be  included,  and  if  so  under  what  circumstances  ? 

They  should. 

Rent — when  paid  in  advance. 

Interest — when  accrued  but  not  received. 

Insurance — the  unexpired  portion  when  paid  in  advance. 

Salaries  and  expenses  of  management — up  to  date  of 
closing  where  same  are  charged  to  cost.  In  this  case,  pro- 
vision would  have  to  be  made  for  their  payment  by  the 
creation  of  a  liability  under  the  head  of  "Salaries  and 
expenses  management  unpaid." 

189.  In  determining  who  are  entitled  to  participate  in 
dividends  of  a  corporation,  what  general  rule  governs  ?  To 
what  dividends  is  a  purchaser  of  shares  entitled  ? 

The  participants  in  dividends  of  a  corporation  are  the 
stock-holders  of  record  on  the  date  of  closing  the  transfer 
books. 

The  general  rule  that  governs  is  that  the  stock  is  sold 
"  ex  dividend "  after  the  transfer  books  are  closed.  If 
he  purchases  the  share  prior  to  the  closing  of  the  transfer 
books  he  is  entitled  to  the  dividend  declared  and  unpaid; 


156 

if,  subsequent  to  that  event  he  is  not  entitled  to  the  divi- 
dend. 

190.  Distinguish   between   fixed   capital   and   floating 
or  circulating  capital.    Give  illustrations  of  each. 

Fixed  capital  is  that  which  does  not  vary  in  amount; 
floating  or  circulating  capital  does.  Defining  capital  as  the 
excess  of  assets  over  liabilities — the  difference  in  the  case 
of  an  individual  or  of  a  partnership  would  be  the  amount 
due  by  the  business  to  them.  This,  while  varying  from 
to-day,  as  profits  or  losses  are  made  is  only  adjusted  and 
allotted  periodically — so  the  capital  will  vary  in  amount. 
But  in  the  case  of  a  corporation  the  amount  of  the  capital  is 
fixed, — i.  e.,  it  does  not  increase  or  decrease. 

Floating  or  circulating  capital  is  what  is  brought  into 
the  business  from  time  to  time,  and  varies  considerably. 

But,  considering  capital  as  an  asset — fixed  capital 
would  be  those  items  not  usually  available  for  trading — 
such  as  real  estate,  plant  and  machinery.  On  the  same 
hypothesis  floating  or  circulating  capital  would  be  that 
portion  consisting  of  notes  receivable,  accounts  receivable, 
merchandise,  &c. — which  would  naturally  vary  from  day 
to  day. 

191.  A  wholesale  grocery  house  has  several  outdoor 
salesmen,  both  in   and  out  of  the   city,   who   are   paid 
commissions  on  their  sales.    What  are  the  danger  points 
to  be  noted,  and  how  would  you  arrange  the  books  and 
accounts  to  protect  your  client  against  the  payment  of 
commissions  not  earned? 


156 

The  danger  points  to  be  noted  and  guarded  against 
are  the  payments  of  commissions  unearned;  the  failure 
to  record  and  charge  back  against  commissions  credited 
to  salesmen  a  pro  rata  amount  for  goods  returned;  reck- 
less sales  to  persons  of  unknown  credit  by  unscrupulous 
salesmen;  overdrafts  against  commissions  credited. 

A  sales  journal  ruled  with  a  sufficient  number  of  col- 
umns to  contain  the  separate  individual  sales  of  each 
salesman  would  furnish  by  monthly  total  the  amount  upon 
which  the  commissions  due  could  be  figured  and  from 
thence  checked  into  the  salesmen's  ledger  accounts.  The 
same  arrangement  could  be  made  in  the  return  sales  book. 
The  passing  of  every  order  through  the  hands  of  a  trust- 
worthy credit  man  would  speedily  stop  injudicious  sales; 
and  the  periodical  inspection  of  the  ledger  accounts  of  the 
salesmen  by  cashier  and  bookkeeper  would  serve  as  an 
effective  check  on  the  overdrawal  of  commission  accounts. 

192.  Describe  what  is  known  as  the  voucher  system  of 
bookkeeping  and  state  some  features  of  this  system  which 
in  your  opinion  make  it  desirable. 

Several  good  and  exhaustive  answers  to  this  question 
have  been  made  in  several  pages  of  this  book  for  the  details 
of  which  the  student  is  referred  to  the  index. 

193.  Is  depreciation  of  plant  a  legitimate  element  of 
the  cost  of  goods  produced?     Explain  the  method  em- 
ployed to  keep  plant  in  efficient  condition  out  of  earnings. 


157 


It  is:  for  it  depreciates  in  value  through  use,  and  it  is 
used  to  manufacture  goods  produced. 

A  certain  amount  should  be  charged  periodically  to 
profit  and  loss  account  and  credited  to  repairs  fund  ac- 
count, against  which  all  expenditure  under  this  heading 
should  be  debited. 

194.  Draw  up  a  form  of  self-proving  pay-roll  which 
will  provide  for  the  determination  of  the  exact  number  of 
bills  and  pieces  of  currency  required  for  its  liquidation. 
Show  wherein  such  a  pay-roll  is  convenient  and  efficient. 

PAY-ROLL   BOOK. 
WEEK  ENDING  MAY  23,  1908. 
DEPARTMENT  A 

Jones  ...................................   25 

Brown  ..................................    12.23 

Thompson  ..............................     3.72 

Willis  ..........................  .  .......     6.25 


47.20 


DEPARTMENT  B 


Robinsc 
Adams 
Johnsoi 

MAY 

)n_                        19.18 

30  10 

i      ,  6.29 

23,  1908. 

68.78 

$115.98 

SUMMARY. 

5 

1 

50  c. 

25  c. 

10  c. 

5c. 

lo. 

8     X10=     80.00 
4     X   5=     20.00 
14     X   1=     14.00 
50c.X    1=          .50 
25c.X   2=          .50 
lOc.X   8=          .80 
5c.X   1-          .05 
lc.Xl3=          .13 

2 
2 

6 
8 

1 

1 
1 

4 

4 

'  i 

5 
8 

4 

14 

1 

2 

8 

1 

13 

$115.98 

A  check  should  be  made  out  for  the  total  amount  of 


158 

the  pay-roll  and  the  summary  attached.  The  first  col- 
umn shows  the  number  of,  the  second  the  denomination  of 
the  bills  and  coins  required.  Such  a  pay-roll  is  efficient 
because  there  is  a  check  on  the  footings  of  the  pay-roll 
book  by  departments,  and  the  exact  number  of  bills  and 
coins  of  each  denomination  to  be  procured  from  the  bank 
so  that  each  pay  envelope  can  be  filled  without  the  neces- 
sity of  "making  change." 

Each  man's  name  should  be  written  on  a  separate  pay- 
envelope  and  the  amount  due  him  as  per  pay-roll.  En- 
velopes should  be  arranged  in  the  order  in  which  the 
names  appear  in  the  pay-roll  book.  The  check  having 
been  cashed  at  the  bank,  the  money  should  be  carefully 
counted  to  see  that  the  amounts  actually  tally  with  the  sum- 
mary. It  is  advantageous  to  have  two  clerks  employed. 
One  takes  the  pay-roll  book  and  the  money.  He  calls  out 
the  first  name,  collects  the  money  together  necessary 
to  make  up  the  amount  of  wages  and  places  it  beside  him. 
The  second  clerk  takes  the  money,  counts  it,  sees  that  it 
corresponds  with  the  amount  noted  on  the  pay-envelope,  in- 
serts same  and  seals  envelope.  If  this  procedure  is  fol- 
lowed and  no  mistakes  made,  the  last  envelope  will  call 
for  the  last  of  the  cash.  If  the  cash  is  over  or  short,  the 
distributors  of  the  envelopes  should  open  each  one  in  the 
presence  of  the  workman,  count  contents,  and  see  that 
they  agree  with  the  amount  marked  outside.  It  is  a  good 
plan  to  send  two  or  more  men  to  the  bank  for  the  cash; 
two  others  to  count  and  compare  same  with  summary; 


159 

and  the  actual  distribution  of  envelopes  by  as  many  men 
as  there  are  departments. 

195.  Define  and  give  an  example  of  (a)  capital  assets, 
(b)  current  assets. 

(a)  Capital  assets  are  those  whose  retention  is  neces- 
sary for  the  carrying  on  of  a  business:  e.  g.,  plant  and 
machinery. 

(b)  Current  assets  are  items  varying  in  amount  and 
nature  from  time  to  time:  e.  g.,  notes  and  accounts  re- 
ceivable. 

196.  How  do  the  accounts  of  a  corporation  and  of  a 
co-partnership  differ  in  the  statement  of  (a)  investments, 

(b)  operation  of  business  and  determination  of  profits, 

(c)  division  and  distribution  of  profits? 

(a)  Investments:  the  investments  of  stockholders  of  a 
corporation  are  not  credited  to  them  on  the  ledger  indi- 
vidually; they  appear  in  one  account — capital  stock.     In 
the  case  of  a  co-partnership  the  amounts  invested  by  the 
partners  are  credited  to  their  individual  capital  accounts. 

(b)  In  the  operation  of  business  and  determination  of 
profits  the  accounts  of  a  corporation  do  not  differ  from 
those  ordinarily  kept  by  partners. 

(c)  In  the  division  and  distribution  of  profits  the  part- 
ners are  bound  by  the  terms  of  the  articles  of  co-partner- 
ship, whereas  a  corporation  is  governed  by  the  acts  of 
its  directors  as  to  distribution,  while  the  division  is  al- 
ways in  the  form  of  a  certain  percentage  of  dividend  de- 


160 

clared  by  the  directors  and  paid  to  stockholders  of  record 
in  proportion  to  the  amount  of  capital  stock  held.  In  the 
case  of  a  co-partnership  profits  when  distributed  are  placed 
to  the  credit  of  the  individual  partners'  capital  accounts, 
while  the  profits  of  a  corporation  are  placed  to  the  credit 
of  surplus,  from  which  dividends  are  declared. 

The  capital  stock  account  of  a  corporation  does  not  vary 
as  to  amount  whether  profits  are  made  or  losses;  the  capi- 
tal of  partners  varies  from  day  to  day  as  profits  or  losses 
are  made;  the  accounts  also  alter  in  amount  as  soon  as 
closing  entries  are  made  and  capital  accounts  adjusted. 

197.  Define  floating  debt,  funded  debt,  and  state  in 
what  respects  they  differ.     Give  an  example  of  each. 

Floating  debt  is  another  term  for  current  liabilities  as 
distinguished  from  funded  debt  which  has  to  be  paid 
at  a  certain  date.  Examples  of  the  former  are  notes  and 
accounts  pa}Table;  of  the  latter  bonds  and  mortgages. 

198.  Define   and   differentiate   revenues,   receipts,   ex- 
penses, disbursements. 

Revenues — incomes  earned  but  not  necessarily  received. 
Receipts — actual  cash  income. 
Expenses — outlays  whether  actually  paid  or  not. 
Disbursements — actual  cash  payments. 

199.  In  arranging  a  system  of  accounts  for  a  firm  en- 
gaged   in   manufacturing   furniture   how   would   you   be 
guided  in  your  selection  of  accounts  and  books?     Outline 
a  simple  arrangement. 


161 

The  various  items  entering  into  cost  of  manufacture 
should  be  entered  in  a  columnar  journal  and  charged  to 
the  several  accounts  in  the  ledger.  Pay-roll  should  be 
divided  into  as  many  parts  as  there  are  manufacturing 
departments.  From  these  it  would  be  easy  to  devise  a  sim- 
ple series  of  cost  accounts  to  arrive  at  the  prime  cost  of 
the  output  of  the  various  departments  of  the  factory. 
Stock  books  should  be  kept.  The  remaining  books  and 
accounts  kept  would  be  the  same  as  in  any  ordinary  busi- 
ness. 

200.  State  two  methods  of  dealing  with  items  accrued 
and  due  (such  as  rent,  commission  and  salaries)  on  both 
the  ledger  and  the  balance  sheet,  when  closing  the  ac- 
counts of  a  business  at  the  end  of  a  fiscal  period. 

Said  items  might  be  charged  to  their  proper  accounts  and 
credited  to  individual  to  whom  due  on  the  ledger.  They 
would  appear  there  as  accounts  payable. 

Again  they  might  be  charged  and  credited  to  expense 
accounts  on  ledger  and  left  outstanding  as  credited 
balances.  They  would  then  appear  on  the  balance  sheet  as 
accrued  charges  under  the  head  of  Liablities. 

201.  The  ledger  of  a  corporation  has  an  account  en- 
titled "First  Mortgage  Bond  Script,"  showing  a  credit 
balance  of  $967.54.      What  does  this  balance  represent, 
and  how  would  you  treat  the  item  in  the  balance  sheet  ? 

The  item  indicates  that  instead  of  interest  on  bonds 
being  paid  at  due  date — scrip — equivalent  to  Bills  Paya- 


162 

ble — bearing  interest — was  issued  instead — redeemable  at 
will  of  parties  issuing  same.  The  amount  would  appear 
on  the  balance  sheet  amongst  the  liabilities  as  "  Scrip " 
First  Mortgage  Bonds — outstanding. 

202.  Describe  the  following  business  forms  and  state 
how  they  relate  to  and  affect  your  books  of  account:  (a) 
domestic  draft  drawn  at  10  days  sight  and  duly  accepted, 
(b)  an  invoice,  (c)  a  bill  of  lading,  (d)  an  account  sales, 
(e)  an  account  current. 

(a)  Such  a  draft  is  virtually  a  Note  Eeceivable  in  the 
hands  of  the  drawer  and  should  be  so  treated.  Suppos- 
ing the  draft  to  be  drawn  by  Henry  Brown  of  New  York 
(to  his  own  order)  on  William  Stubbs  of  Albany.  On 
receipt  of  the  accepted  draft  Brown  enters  same  under 
due  date  in  his  Bills  Eeceivable  book  and  deposits  it  for 
collection  in  his  bank.  On  notification  from  the  bank  that 
the  draft  has  been  paid  he  credits  Stubbs  with  the  amount 
through  the  cash  book  and  debits  cash. 

(6)  An  invoice  is  a  bill  of  particulars  of  goods  sold  by 
one  person  to  another.  It  contains  date  of  sale,  name  of 
seller,  name  of  purchaser,  particulars  of  quantities,  prices, 
amounts,  and  total  of  amount  of  the  various  extended 
items.  The  bill  is  copied  into  a  Sales  Book  and  the  total 
charged  to  the  ledger  account  of  the  purchaser.  If  a 
single  journal  entry  were  made  of  the  transaction  the 
entry  would  be : 

Purchaser,  Dr., 

To  Merchandise  Account. 


1C3 

203.  What  are  controlling  accounts?  For  what  pur- 
pose are  they  employed  and  how  are  they  conducted? 
Give  three  examples,  with  clear  explanation  of  each. 

Controlling  accounts  are  kept  in  the  general  ledger  to 
total  balances  of  all  accounts  kept  in  other  ledgers.  As  the 
general  ledger  is  kept  by  one  person  and  other  ledgers  are 
kept  by  perhaps  several  bookkeepers,  the  correctness  of  the 
total  contents  of  these  several  ledgers  exhibited  by  the 
totaled  schedules  of  balances  furnished  are  controlled  by 
the  balances  of  the  controlling  accounts  in  the  general 
ledger. 

These  accounts  are  employed  for  two  purposes:  (1)  to 
enable  the  keeper  of  the  general  ledger  to  take  off  a  com- 
plete trial  balance  at  the  end  of  a  month  from  his  own 
book  without  waiting  for  the  proved  correct  trial  balances 
taken  from  all  the  other  ledgers;  (2)  to  enable  the  general 
ledger  bookkeeper  to  control  the  correctness  of  the  totals 
furnished  him  by  the  keepers  of  the  other  ledgers — as  if 
wrong  figures  are  submitted  no  correct  totals  of  contents 
of  balances  he  is  able  immediately  to  detect  the  error. 
This,  of  course,  presupposes  that  the  general  bookkeeper 
has  proved  the  cash  balance  and  has  checked  the  footings 
of  the  books  of  original  entry,  and  his  own  postings  of  the 
totals.  His  own  ledger  (the  general)  being  in  balance  he 
can  safely  then  rely  on  the  accuracy  of  the  amounts  called 
for  from  all  other  ledgers  by  his  controlling  account. 

Three  examples : 


1G4 

Controlling  Account   (customers). 
Controlling  Account  (creditors). 
Controlling  Account  (Bills  Receivable). 

As  a  full  explanation  of  these  accounts  and  the  method 
of  conducting  them  has  been  already  given  in  the  answers 
to  questions  7,  97,  230  and  231,  the  author  has  not  con- 
sidered it  necessary  to  go  into  the  matter  in  further  detail. 
The  Bills  Receivable  controlling  account  presupposes  the 
existence  of  a  Bills  Receivable  ledger,  and  a  special  column 
in  the  cash  book  in  which  is  entered  all  amounts  received  in 
payment  of  notes. 

204.  Purchases,  sales,  returns  and  allowances  are  fre- 
quently posted  in  common  to  an  account  called  Merchan- 
dise. Describe  fully  the  limitations  of  an  account  so  kept, 
and  suggest,  with  reasons  in  support  thereof,  an  improved 
method  of  keeping  records  of  such  transactions. 

An  account  so  kept  has  been  aptly  described  as  non- 
descript, as  it  is  partly  real  and  partly  nominal — the  bal- 
ance until  the  amount  of  the  inventory  on  hand  has  been 
added  to  the  credit  side  or  deducted  from  the  debit  side 
being  meaningless;  in  other  words,  it  gives  no  details  of 
value.  The  account  should  be  divided  thus: 

Merchandise  a/c  (Inventory  at  beginning). 
(Purchases). 
(Returned  Purchases). 
(Sales). 
"  (Returned  Sales). 


165 

These  balances  entered  in  the  trial  balance  monthly 
would  furnish  valuable  data  for  the  compilation  of  com- 
parative statistics. 

205.  In  a  certain  business  the  cash  receipts  are  em- 
ployed in  part  to  defray  current  expenses.      Other  dis- 
bursements are  by  check  against  funds  deposited.     In  ar- 
ranging books  of  account  for  such  a  business  how  would 
you  provide  a  clear,  direct  and  labor-saving  record  of  all 
cash  receipts  and  disbursements?     Show  the  advantages 
of  this  plan. 

All  checks  received  should  be  posted  in  one  column  of 
the  Cash  Book;  all  cash  receipts  in  another.  On  the 
other  hand  cash  payments  could  be  separated  from  pay- 
ments made  by  check  by  the  use  of  separate  columns  on 
the  other  side  of  the  cash  book.  The  difference  of  the 
totals  would  show  the  actual  amount  of  cash  on  hand,  while 
checks  could  be  verified  by  stubs  of  check  book  and  pass 
book.  No  especial  arrangement  of  books  of  account  need 
necessarily  be  made. 

206.  If  your  trial  balance  shows  an  account  having  a 
debit  excess  what  does  the  circumstance  signify?    Does  the 
debit  balance  shown  by  the  trial  balance  indicate  the  true 
status  of  the  account?    Explain. 

The  significance  of  the  debit  excess  may  be  threefold: 
Personal  accounts:  debit  balances  indicate  the  amount 
charged  to  and  unpaid  by  customers;  in  the  case  of  credi- 
tors (as  sometimes  happens  by  carelessness)  the  cash  paid 


•  166 

in  settlement  of  an  account  before  the  bill  has  been  credi- 
ted on  the  ledger. 

Impersonal  accounts  (1)  Real — here  the  debit  balance 
indicates  capital  expenditure  which  appears  as  an  asset 
on  the  balance  sheet.  (2)  Nominal — the  balance  shows 
income  expenditure  or  the  excess  of  income  expendi- 
ture over  revenue  receipts  where  both  are  kept  in 
one  account,  e.  g.}  interest,  discount. 

Merchandise  a/c  debit  balance,  as  previously  stated,  at 
any  time  prior  to  closing  indicates  the  fact  that  the  in- 
ventory at  the  beginning  of  the  period  plus  purchases  and 
returned  sales  exceeds  the  sales  and  returned  purchases  to 
date.  The  debit  balance  does  not  always  indicate  the  true 
status  of  the  account  as  has  been  just  pointed  out,  i.  e., 
Merchandise  Account. 

Again,  to  show  the  true  status  of  Real  Accounts  such 
items  as  depreciation,  &c.,  would  have  to  be  taken  into 
consideration ;  and  the  case  of  personal  accounts,  discounts, 
and  bad  debts  must  not  be  overlooked. 

207.  What  are  auxiliary  books  as  understood  in  ac- 
counting terminology?  Mention  three  books  of  this  class 
and  explain  their  use. 

•*!» 

Auxiliary  books  are  those  used  to  record  transactions 
in  detail  which  do  not  appear  in  the  ordinary  financial 
books  of  a  business  (cash  book,  ledger,  journal,  &c.). 

Three  books  of  this  class  are :  ( 1 )  Stock  Ledger  to  con- 


167 

tain  names  and  amount  of  individual  holdings  of  stock- 
holders of  a  corporation. 

(2)  Transfer  book  to  record  names  of  buyers  and  sellers 
of  capital  stock,  number  of  shares  transferred,  &c. 

(3)  Minute  book  in  which  is  entered  particulars  of  pro- 
ceedings at  directors'  and  stockholders'  meetings,  &c. 

208.  The  by-laws  of  a  national  fraternal  organization 
provide  that  all  receipts  shall  be  remitted  to  the  secretary 
who  shall  transmit  the  same  to  the  treasurer.  All  dis- 
bursements are  made  by  the  treasurer  on  warrants  of 
the  secretary,  properly  countersigned.  The  treasurer 
(located  in  Chicago)  receives  no  money  except  such  as  is 
sent  to  him  by  the  secretary,  whose  location  is  Boston.  How 
should  interest  on  the  treasurer's  bank  balances,  allowed 
by  the  Chicago  bank,  be  treated  and  recorded?  Explain, 
and  give  reasons  for  your  answer. 

All  cash  remitted  to  the  treasurer  by  the  secretary,  as 
received  by  secretary  would  be  charged  to  his  own  cash 
account  and  credited  to  the  persons  from  whom  received. 
When  remitted  to  treasurer  cash  would  be  credited  and 
treasurer  charged.  The  treasurer  on  receipt  of  remittances 
from  secretary  would  debit  his  own  cash  account  and  credit 
secretary.  The  treasurer's  debit  account  on  secretary's 
books  would  thus  correspond  with  the  secretary's  credit 
balance  on  treasurer's  books.  When  the  treasurer's  pass 
book  is  credited  with  interest  by  Chicago  bank  he  should 
request  a  credit  memorandum  from  the  bank  for  the 
amount  of  interest  allowed  which  he  should  forward  to 


168 

the  secretary  at  Boston.  Treasurer  would  credit  interest 
account  and  debit  cash.  Secretary  would  charge  treasurer 
and  credit  interest. 

The  reason  for  this  is  that  the  entries  of  total  cash  re- 
ceived and  paid  on  books  of  treasurer  and  secretary  should 
exactly  correspond  and  cross  check. 

209.  In  a  certain  work  on  bookkeeping  this  paragraph 
appears :  "  When  we  get  a  note  discounted  in  the  bank 
the  note  is  paid  so  far  as  we  are  concerned,  so  we  must 
credit  Bills  Receivable  for  the  full  face  of  the  note  on  the 
debit  side  of  the  cash  book  and  debit  Interest  on  the  oppo- 
side  of  the  cash  book  for  the  amount  of  the  dis- 
count." Having  in  mind  the  axioms  that  "bookkeeping 
is  a  faithful  record  of  business  transactions "  and  that 
"  a  financial  statement  should  reveal  the  true  condition 
of  any  concern,"  do  you  accept  or  reject  the  foregoing 
statement  ?  Give  detailed  reasons  for  your  answer. 

The  statement  is  erroneous;  the  method  of  recording 
the  transaction  is  open  to  serious  objections;  and  a  finan- 
cial statement  made  up  from  such  figures  would  not  reveal 
"the  true  condition  of  any  concern." 

For  (1)  while  it  is  true  that  when  the  note  is  discounted 
it  is  paid,  it  is  not  paid  by  the  maker,  but  by  the  bank; 
so  that  in  the  event  of  its  not  being  met  at  maturity  by 
the  maker  "we"  should  have  to  repay  the  face  value  of 
the  note  to  the  bank,  plus  protest  fees,  &c.  Notes  dis- 
counted should  be  credited  then  to  a  contingent  liability 
account — the  total  amount  of  which  would  appear  as 
such  at  the  close  of  a  particular  fiscal  period. 


169 

(2)  The  cash  book  entry  would  not  be  "a  faithful  rec- 
ord" of  the  transaction,  for  (a)  the  face  value  of  the 
note  was  not  received  when  discounted,  but  only  the  face 
value  less  discount;  and  (b)  the  total  cash  receipts  at  the 
end  of  the  month  as  shown  in  cash  book  would  be  incor- 
rect. 

210.  Where  and  how  would  you  record  a  customer's 
promissory  note  when  (a)  received,  (&)  discounted,  (c) 
protested?  State  fully  the  object  and  effect  of  each  entry 
on  the  account  involved. 

(a)  When  received,  the  note  should  be  entered  in  the 
Bills   Receivable   book,   stating  date   of  note,   due   date, 
amount,  where  payable.     It  should  then  be  posted  to  the 
credit  of  the  customer's  account  in  the  ledger,  and  at 
end  of  every  month  the  total  amount  of  notes  receivable 
recorded  in  the  bill  book  should  be  posted  to  the  Dr.  of 
Bills  Receivable  Account  in  the  ledger. 

(b)  When  discounted — "discounted — bank"  date,  &c., 
should  be  noted  against  the  amount  of  note  in  the  bill 
book,  and  bills  receivable  account   (contingent  liability) 
in  the  ledger  credited.     When  paid  by  the  maker  at  ma- 
turity, a  journal  entry  should  be  made  as  follows: 

Bills  Receivable  (contingent  liability  a/c)  Dr. 

To  Bills  Receivable  Account. 
Note  of  A.  B.  reported  by  bank  paid. 

(c)  When  protested  the  face  value  of  note  plus  protest 
fee  would  have  to  be  paid  to  bank  by  the  party  who  dis- 


170 

counted  same.  Through  journal  Bills  Eeceivable  (contin- 
gent liability  a/c)  should  be  debited  and  Bills  Eeceivable 
Account  credited.  Through  cash  book  the  maker's  per- 
sonal account  should  be  charged  with  the  face  value  of  the 
note  plus  protest  fee,  &c. 

(d)  The  object  and  effect  of  entering  note  in  the  bill 
book  is  to  record  particulars  in  detail  and  afford  facility 
for  reference;  in  the  bills  receivable  account  to  show  the 
total  amount  due  on  notes;  to  the  credit  of  the  customer's 
account  to  show  that  the  account  is  no  longer  collectable 
as  "  open  " — but  has  been  closed  by  a  promise  to  pay  on 
a  certain  day — evidenced  by  a  note  recorded  in  the  bill 
book. 

(e)  When  discounted,  cash  is  debited  because  the  amount 
less  discount  is  received  from  the  bank;  bills  receivable 
account   (contingent  liability  a/c)   is  credited,  because  if 
the  maker  does  not  pay  "  we  "  must — provision  is  made 
for  this  contingency  (and  it  very  frequently  so  happens) 
by  thus  recording  the  transaction.      It  must  be  borne  in 
mind  that  all  assets  are  relatively  "  contingent " — but  in 
this  case  the  asset   (note  Eeceivable)   becomes  an  actual 
contingent  liability. 

(/)  When  protested,  and  repaid  to  the  bank  by  the  party 
who  discounted  the  contingent  liability  (having  become 
actual)  is  discharged,  and  the  note  appearing  in  bills  receiv- 
able account  is  charged  back  to  the  customer. 

211.  What  do  you  understand  by  comparative  statistics 
as  applied  to  accounting?  When,  to  what  extent  and  in 


171 

what  particulars  would  you  make  use  of  your  knowledge 
of  this  branch  of  commercial  science? 

By  comparative  statistics  is  meant  the  comparing  (by 
placing  side  by  side)  the  totals  of  items  of  revenue  expen- 
diture or  income  for  any  specified  period.  They  can  be 
used  in  any  kind  of  business,  and  if  proper  records  are 
kept  in  detail,  data  can  be  obtained,  by  which  compari- 
sons may  be  made  of  subsidiary  accounts. 

In  an  ordinary  trading  business  comparison  may  be 
made  of  the  percentage  of  gross  profit  as  shown  by  the 
merchandise  accounts ;  of  net  profit  through  the  profit  and 
loss  accounts.  Where  departmental  accounts  are  kept  the 
percentage  of  profits  earned  may  be  compared  month  by 
month — or  year  by  year;  the  expenses  and  wages  also 
shown. 

In  manufacturing  accounts  where  proper  cost  books  are 
kept  and  results  tabulated,  comparative  statistics  as  to 
cost  and  proceeds  can  be  obtained.  In  railroad  accounts 
gross  and  net  earnings  can  be  compared  month  by  month 
with  corresponding  months  of  former  years.  In  short,  a 
knowledge  of  "  this  branch  of  commercial  science  "  may  be 
made  use  of  in  almost  every  kind  of  business. 

212.  The  following  are  accounts  mommonly  employed 
in  brewery  bookkeeping:  cooperage,  capital  stock,  brewing 
materials,  customers'  loans,  revenue  stamps,  notes  payable, 
wages  (brewery-men),  advertising,  repairs,  fuel,  collection 
expense,  salaries  (official  and  clerical),  stable  supplies  and 
expense,  sales,  cash,  freight  and  cartage  (inward),  re- 


172 


turned  beer,  wages  (drivers  and  stable-men),  freight  and 
cartage  (outward),  interest,  manufacturing  expense,  in- 
surance, profit  and  loss,  real  estate,  bonded  debt.  Classify 
the  above  mentioned  accounts  for  ledger  and  financial 
statement  purposes. 

LEDGER  PURPOSES  AND"  FINANCIAL  STATEMENTS. 


DR. 


Cash  a/c 
Real  Estate 
Customer's  Loans 
Brewing  Materials 


CR. 


Notes  Payable 

Bonded  Debt 

Capital  Stock 

Surplus  (Profit  and  Loss  a/c) 


The  above  are  Assets  and  Liabilities  appearing  in  the 
Balance  Sheet. 


DR. 

Brewing  Materials  (used) 

Wages  (Brewery  Men) 

Repairs 

Fuel 

Freight  and  cartage  (inward) 

Manufacturing  Expense 


CR. 


The  above  are  items  of  manufacturing  cost. 


DR. 

Cooperage 

Revenue  Stamps 

Advertising 

Collection  Expenses 

Salaries  (O.  and  C.) 

Stable  Supplies  and  Expenses 

Returned  Beer 

Wages  (D.  &  S.) 

Freight  and  Cartage  (outward) 

Interest 

Insurance 


CR. 


Sales 


173 


The  above  items  added  to  cost  of  manufactured  goods 
sold  deducted  from  sales  gives  the  net  profit  on  trading. 

213.  Detail  a  scheme  for  keeping  shipping  accounts  so 
that  the  true  and  exact  condition  of  each  venture  can  be 
shown  at  any  time.  Give  entries  for  every  phase  of  ship- 
ping transactions,  including  advances  to  shipper  by  con- 
signee, and  state  the  object  and  effect  of  each  entry. 

This  question  can  be  answered  best  by  means  of  an  ex- 
ample : 

J.  Brown  of  New  York  ships  to  A.  Jones  in  New  Orleans 
merchandise  (cost  value  $5,000)  on  consignment,  agreeing 
to  pay  him  ten  per  cent  commission  on  the  gross  sales. 
Brown  draws  on  Jones  at  sight  from  time  to  time  for  sums 
amounting  to  $1,000,  said  drafts  being  duly  paid.  Jones 
having  disposed  of  the  merchandise  renders  an  account 
sales  to  Brown,  showing  sales  $9,000  as  against  cost,  $5,000, 
.freight  paid  by  him  $100,  expenses  $300,  commission 
$900,  and  forwards  a  check  for  $6,700  to  balance. 

BROWN'S  LEDGER. 
MERCHANDISE  ACCOUNT. 


|  By  consgt.  Jones 


$5000.00 


A.  JONES,  SHIPMENT  ACCOUNT,  A/C  SALES 


To  Consignor  5000.00 

"Freight  100.00 

' '  Expense  300.00 

' '  Commission  900.00 

"  P.  &L.  a/c  (Profit  of 

shipment)  $2700.00 


$9000.00 


By  Sales  as  per  a/c 

rendered  by   Jones    $9000.00 


$9000.00 


174 
A.  JONES,  CONSIGNMENT  A/C. 


To   Sales   as  per  a/c 
rendered                       $9000.00 

By  cash  on  a/c 
"   Freight 

$1000.00. 
100.00 

11   Expense 
'  '    Commission 

300.00 
900.00 

"    Cash 

6700.00 

$9000.00 

$9000.00 

CASH  BOOK. 


DR. 

To  A.  JONES, 


$1000.00 
6700.00 


CR. 


All  other  entries  on  Brown's  books  would  be  posted 
through  the  journal. 

LEDGER  A/C  OF  A.  JONES. 
J.  BROWN  (Consignment). 


To  Cash, 

(  i 

$1000.00 
6700.00 

By  Mdse.,                       $5000.00 
"   Balance,  a/c  sale       2700.00 

$7700.00 

$7700.00 

J.  BROWN, 

CONSIGNMENT,  a/c  SALES. 

To  Mdse., 
"  Freight. 
"  Expense, 
'  '  Commission 
"  Balance 

$5000.00 
-100.00 
300.00 
900.00 
2700.00 

By  Sales,                         $9000.00 

$9000.00 

$9000.00 

175 
CASH  BOOK. 

DR. 

To  Sales,                         $9000.00 

By  J.  Brown, 
(i         « 

11   Freight, 
"   Commission, 
"   Expense, 

CR. 

$1000.00 
.6700.00 
100.00 
900.00 
300.00 

$9000.00 

$9000.00 

J.  JONES  (personal  a/c). 


To  cash,  $900.00 


By  Commission,  $900.00 


By  a  consignment  or  shipment  is  meant  the  transfer  of 
the  custody  (but  not  the  title)  of  merchandise  by  one 
party  called  the  consignor,  to  another  called  the  consignee. 
The  consignor  allows  commission  on  sales  and  receives 
cash  for  proceeds  less  expenses  incurred  in  the  transac- 
tions, commission,  &c.,  so  set  forth  in  the  "  account  sales  " 
rendered  by  the  consignee  when  the  merchandise  has  been 
disposed  of. 

214.  Examination  of  the  books  of  a  plumbers'  supply 
house  shows  that  all  outgoing  bills  are  press  copied  and 
posted  individually  to  Customers'  accounts,  the  monthly 
aggregate  of  sales  being  credited  to  Merchandise  account. 
Many  customers  have  charges  daily  or  oftener.  What 
change  in  method  can  you  suggest  that  would  lead  to  a 
more  intelligent  statement  of  results,  save  labor  and  avoid 
congestion  ? 


176 

The  introduction  of  what  is  known  as  an  Invoice  Sales 
book  would  have  the  desired  effect.  In  a  bound  book 
invoice  forms  are  attached  to  stubs.  The  sales  ticket  is 
copied  on  to  a  stub — the  invoice  attached  being  made  out 
from  the  stub  at  any  time  required.  If  there  were  20 
different  charges  during  the  month  to  a  customer  the 
sales  tickets  would  all  be  copied  on  to  the  same  stub — 
and  the  invoice  made  out  therefrom.  At  the  end  of  the 
month  the  bill  and  stub  would  but  be  footed  and  totals 
should  agree.  The  total  of  each  stub  would  be  charged 
to  customer's  account  in  ledger;  the  total  of  all  the  stubs 
to  the  credit  of  merchandise  account.  The  invoice  book 
should  be  indexed  and  the  ledger  folio  of  each  customer 
noted  on  stub  and  on  invoice.  This  does  away  with 
the  necessity  of  press-copying  bills  and  necessitates  the 
posting  to  customer's  a/c  of  only  one  amount  monthly 
instead  of  possibly  twenty  or  thirty. 

215.  What  results  are  sought  to  be  secured  in  the  keep- 
ing of  accounts  with  Branch  Houses?  Under  what  cir- 
cumstances would  you  debit  or  credit  such  accounts? 
What  would  the  balance  of  any  such  account  show? 

(a)  Results  sought:  particulars  of  amount  of  cash  re- 
ceived and  paid  and  balance  on  hand  at  any  given  time; 
amounts  of  sales — credit  and  cash  and  amount  of  cus- 
tomer's account  outstanding;  amount  of  purchases — credit 
and  cash  and  amount  owing  to  creditors;  amount  of  stock 
on  hand ;  expenses ;  and  profit  or  loss  for  any  given  period 
of  each  branch. 


177 

(b)  Example:  supposing  there  is  a  debit  balance  against 
a  branch  establishment  at  the  end  of  a  fiscal  period — this 
would  show  the  amount  of  the  investment  in  a  particular 
branch — consisting  of  assets  less  liabilities  due  the  head 
office.  If  a  Profit  and  Loss  a/c  be  rendered  by  the  branch 
house  showing  a  profit,  a  journal  entry  would  be  made 
on  books  of  head  office  debiting  branch  house  and  credit- 
ing P.  and  L.  a/c.  The  branch  office  would  have  a  credit 
balance  due  head  office,  and  on  closing  the  books  it  would 
debit  its  P.  &  L.  a/c  and  credit  head  office  account. 
Thus  the  head  office  credit  balance  on  branch  books  would 
always  equal  branch  office  debit  balance  on  head  office 
books. 

216.  Define  the  following  accounts:  franchise,  patents, 
equipment,  construction.  State  in  •  what  line  of  business 
such  accounts  occur,  for  what  purpose  they  are  employed 
and  how  they  are  generally  treated. 

Franchise:  the  right  to  operate  a  rail-road,  street-car 
line,  telephone  wires — conferred  by  legislature. 

Patents:  the  virtual  lease  of  a  monopoly  for  a  term 
of  years — the  right  to  manufacture  and  sell  exclusively 
certain  articles. 

Equipment:  cost  of  locomotives,  cars,  cost  of  furniture 
in  station  houses,  fixtures,  tools,  &c.,  would  all  come  under 
this  heading. 

Construction:  in  railroads  this  includes  original  cost  of 
tracks,  structures,  right  of  ways,  expenses  in  negotiating 


178 

sales  of  stocks  and  bonds,  discount  on  sales  of  securities, 
&c. 

All  of  these  accounts  occur  in  rail-road  business. 

Purposes :  (a)  Franchise  to  show  cost  of  obtaining  right 
to  operate.  The  a/c  is  charged  with  amounts  paid. 

(b)  Patents:  cost  of  obtaining  right  to  manufacture  a 
certain  article  exclusively.  It  is  charged  with  cost  and 
written  off  periodically  in  amounts,  the  total  of  which 
will  amount  to  original  cost  at  the  time  the  patent  ex- 
pires. Equipment  a/c  shows  cost  of  all  items  coming 
under  this  particular  heading — the  expense  of  maintaining 
or  replacing  same  when  worn  out  would  have  to  be  charged 
against  "operating  expenses." 

Construction  a/c:  includes  initial  costs  as  above  stated. 
Maintenance  would  be  charged  against  operating  expenses, 
while  extensions  and  improvements  would  be  charged 
against  construction. 

217.  A  merchant  draws  a  draft  of  $1,000  at  four 
months  on  a  customer  who  owes  him  on  open  account  and 
the  draft  is  accepted  on  February  2,  1905.  On  March 
13,  1905  he  discounts  the  draft  at  a  bank  at  6  per  cent  per 
annum.  What  entries  should  be  made  on  the  merchant's 
books  to  record  properly  the  transactions? 

On  receipt  of  the  accepted  draft  the  customer's  account 
should  be  credited  with  its  face  value  and  Bills  Eeceivable 
account  debited;  detailed  particulars  entered  in  the  Bills 


179 

Receivable  book.     The  ledger  entries  would  be  effected 
by  means  of  the  journal;  the  usual  form  being,  e.  g., 

Bills  Receivable,  Dr.,  $1,000.00. 

To  A.  B.  $1,000.00. 

"  Accepted  draft  received  from  A.  B.  dated ,  due 

,  in  settlement  (or  on  a/c)  of  account  due. 


When  the  draft  is  discounted  at  a  bank,  cash  and  the 
amount  of  the  interest  are  debited  in  the  Cash  Book  in 
separate  columns  and  credited  in  one  amount  to  Bills 
Receivable  (contingent  liability  account). 

As  soon  as  the  bank  sends  notification  of  the  payment 
of  the  draft  by  the  drawer  a  journal  entry  should  be  made 
debiting  Bills  Receivable  (contingent  liability  account)  and 
crediting  Bills  Receivable  account.  The  transaction  is 
thus  only  recorded  and  closed. 

218.  Define  the  term  depreciation  and  give  generally 
your  method  of  determining  the  amount  to  be  charged 
against  income. 

All  articles  subject  to  "wear  and  tear"  depreciate  in 
value  from  usage — sometimes  also  from  non-usage:  fa- 
miliar items  being  Plant  and  Machinery,  Furniture  and 
Fixtures,  &c.  If  provision  is  not  made  for  replacement 
when  worn  out,  it  is  clear  that  at  the  expiration  of  the 
life  of  the  articles,  fresh  capital  will  have  to  be  brought 
into  the  business  wherewith  to  purchase  new  ones,  inas- 
much as  the  initial  installation  was  "  capital  expenditure/' 


180 

ranking  on  the  balance  sheet  as  "  capital  assets."  To  pro- 
vide for  this  replacement,  it  is  usual  to  periodically  charge 
against  income  and  credit  to  "  reserve  for  depreciation  " 
account  such  an  amount  as  will,  coincidently  with  the  ex- 
piration of  the  life  of  the  items  subject  to  wear  and  tear, 
equal  the  original  values  charged  and  standing  open  on 
the  books  as  assets. 

To  determine  the  amount  to  be  charged  against  in- 
come, find  out  the  average  life  of  the  article  subject  to 
depreciation;  divide  cost  value  by  the  number  of  years  of 
life ;  the  quotient  will  give  result  required. 

219.  Show  the  form  of  a  purchase  ledger  for  a  mer- 
cantile concern,  and  state  whether  you  would  recommend 


the  use  of  a  bound  or  loose  leaf  book, 
your  answer. 

Purchase  Ledger — (form). 


Give  reason  for 


PURCHASE   LEDGER— (FOBM) 
1908       DE 


1908 


CR. 


July 

31 

To  CashC. 

40  ! 

300 

I    June 

30 

ByMdse.J. 

20 

300 

The  author,  personally,  speaking  from  an  auditor's 
standpoint,  is  strongly  in  favor  of  bound  books.  Loose 
leaves  are  easily  removable  and  to  a  certain  extent  facili- 


181 

tate  irregularities  on  the  part  of  careless  or  dishonest  em- 
ployees. Moreover  the  absence  of  ledger  indexes  enhances 
considerably  the  auditor's  work  in  checking  postings.  On 
the  other  hand  the  system  seems  to  meet  with  the  approval 
of  the  majority  of  bookkeepers  as  doing  away  with  the 
necessity  of  opening  new  ledgers  and  transferring  accounts. 
Only  active  accounts  are  kept  in  the  loose-leaf  ledger  fol- 
der and  it  is  justly  claimed  that  the  bookkeeper's  work 
is  curtailed  materially  by  this  method. 

220.  Define  fixed  assets,  current  assets.  Give  two  ex- 
amples of  each  class. 

Fixed  Assets  are  those  items  which  while  necesasry  to 
the  successful  conduct  of  a  business  are  not  available  for 
trading  purposes,  i.  e.,  cannot  ordinarily  be  converted  into 
cash  for  the  purpose  of  buying,  and  selling  merchandise 
at  a  profit. 

Current  Assets  fluctuate  from  day  to  day  in  transacting 
business  and  represent  cash  or  what  can  be  realized  as  such. 

Two  examples  of  each  class: 

Fixed  Assets:    Real  Estate. 

Plant  and  Machinery. 

Current  Assets:  Cash. 

Bills  Receivable. 

221.  A  grocery  house  employs  a  number  of  salesmen 
who  act  as  collectors.  Suggest  a  system  that  would  tend 
to  prevent  defalcations  on  their  part. 


182 

It  may  be  broadly  stated  that  no  known  system  of  ac- 
counting will  prevent  defalcations;  but  one  may  be  de- 
vised such  as  to  render  their  detection  by  an  audit  inevita- 
ble. Assuming  that  each  salesman  collects  only  from 
those  firms  to  which  he  personally  sells,  a  columnar  sales 
journal  should  be  used,  the  columns  being  headed  with  the 
names  of  each  salesman,  and  all  goods  sold  charged  to 
the  customer  in  the  column  of  the  person  effecting  the 
sale.  The  cash  book  should  be  similarly  ruled  and  cash 
received  from  each  collector  by  the  cashier  similarly 
treated.  Each  sales  account  in  the  ledger  should  have 
salesman's  number  or  initial  entered  after  the  customer's 
name  at  the  head  of  the  page  and  thus  the  responsibility 
for  the  collection  of  any  single  account  located.  Each 
salesman  should  be  provided  with  a  numbered  receipt 
book — stub  number  and  detachable  receipt  form  being 
both  consecutively  numbered.  The  stubs  contain  particu- 
lars of  namerf  of  customers  from  whom  collection  was  made, 
date  and  amount.  These  particulars  are  recorded  in  the 
cash  book  by  the  cashier  daily  and  the  amount  of  cash 
turned  in  balanced  with  the  stubs  which  should  each  be 
initialed  by  him.  All  customers  should  be  notified  that  a 
printed  receipt  is  to  be  furnished  by  the  collector  and 
monthly  statements  should  be  mailed  direct  to  the  cus- 
tomer by  the  bookkeeper,  accompanied  by  a  printed  notice 
requesting  verification  of  the  amount  of  balance  outstand- 
ing and  immediate  notification  to  the  head  office  of  any 
apparent  discrepancy.  As  a  further  safeguard,  an  addi- 


183 

tional  collector  should  be  employed  to  make  occasional  col- 
lections for  the  regular  salesman. 

222.  Give  the  advantages  and  the  disadvantages  of  a 
voucher  system  of  accounts. 

Advantages:  The  facility  with  which  a  continuous 
analysis  of  expenditure  can  be  kept  by  means  of  the  col- 
umnar system;  the  very  considerable  saving  of  time  in 
doing  away  with  detailed  posting ;  the  elimination  of  credi- 
tor's individual  ledger  accounts;  the  ability  to  ascertain 
the  gross  amount  due  to  creditors  by  means  of  the 
"vouchers  payable"  account  balances,  obviating  the  neces- 
sity of  taking  off  a  trial  balance  to  prove  correctness. 

Disadvantages:  The  constant  liability  of  items  being 
entered  in  wrong  columns;  the  possibility  of  accounts 
being  paid  twice;  the  inability  to  determine  by  record  in 
ledger  details  of  past  transactions,  or  total  purchases  made 
from  a  particular  firm  for  any  specified  period. 

223.  What  is  the  difference  between  a  trial  balance 
and  a  balance  sheet? 

The  difference  is  this:  while  the  trial  balance  contains 
the  balances  of  all  the  accounts  standing  open  on  a  given 
date — real,  nominal  and  personal,  the  balance  sheet  em- 
braces only  assets  and  liabilities — the  nominal  accounts 
having  been  closed  out  into  the  profit  and  loss  account, 
and  the  balance  of  this  transferred  (whether  profit  or  loss 
is  made)  to  capital  account,  or  if  a  corporation  to  sur- 
plus account. 


184 

224.  In  what  order  should  the  assets  in  a  balance  sheet 
be  set  out?    Give  reasons. 

There  is  no  hard  and  fast  rule  on  the  subject  in  actual 
practice,  as  may  be  seen  by  the  various  printed  forms  of 
order  used  by  public  accountants  in  the  statements  certi- 
fied to  by  them  as  correct  in  their  capacity  as  auditors; 
and  so  far  as  a  logical  reason  can  be  adduced  in  support 
of  the  form  used  the  order  of  the  items  is  of  no  particular 
moment.  It  would  seem  fairly  reasonable  to  adopt  the 
following :  place  the  assets  in  the  order  of  their  realization, 
i.  e.,  the  facility  with  which  they  could  be  converted  into 
cash.  Cash  being  on  hand  would  naturally  come  first. 
Notes  receivable  could  probably  be  discounted  would  come 
next;  followed  by  accounts  receivable  which  could  be  col- 
lected. The  fixed  assets  would  come  last. 

On  the  other  hand  liabilities  should  appear  in  the  order 
of  their  liquidation,  i.  e.,  the  order  in  which  they  would 
ordinarily  have  to  be  paid.  Notes  payable,  accounts  paya- 
ble, dividends  declared  and  unpaid,  accrued  liabilities, 
capital,  undivided  profits  or  surplus  is  the  natural  order 
and  meets  with  fairly  general  acceptance  and  approval. 

One  important  factor  not  to  be  overlooked  in  the  adop- 
tion of  this  order  is  that  if  the  ledger  accounts  be  cor- 
respondingly arranged,  as  soon  as  the  inventory  is  taken 
and  closing  entries  made  the  balance  sheet  can  be  con- 
structed with  a  minimum  expenditure  of  time  and  labor. 

225.  What  governs  the  distribution  of  profits  in   (a) 
a  partnership,  (I)  a  corporation? 


185 

(a)  Partnership :  The  distribution  of  profits  is  governed 
by  the  co-partnership  articles  of  agreement  which  usually 
specify  the  proportion  to  which  each  partner  is  entitled. 
Where  no  such  terms  are  stated  in  the  agreement  it  is 
asumed  that  the  profits  are  to  be  divided  equally,  irre- 
spective of  the  amount  of  invested  capital  standing  to  the 
credit  of  individual  partners. 

(b)  Corporation :  In   this   case   the   profits   should  be 
credited  to  surplus  account  and  it  is  from  this  balance  that 
the  directors  of  a  corporation  distribute  profits  amongst 
tne  stockholders  of  the  company  in  the  form  of  dividends. 

Thus,  supposing  the  capital  stock  of  a  corporation  is 
$1,000,000.00,  and  there  be  a  considerable  amount  stand- 
ing to  the  credit  of  surplus  account,  the  directors  might 
agree  that  they  would  be  justified  in  distributing  a  por- 
tion of  it  amongst  the  stockholders.  If  a  dividend  of  six 
per  cent  were  made,  surplus  account  would  be  debited 
with  $60,000.00  and  dividend  account  credited  with  a  like 
amount.  Dividend  account  would  be  charged  and  cash 
credited  with  this  amount;  checks  being  mailed  to  the 
stockholders  of  record  (at  the  time  of  closing  the  transfer 
books)  for  the  amount  due  them  computed  on  the  basis 
of  the  number  of  shares  held  by  individual  holders. 

226.     Give  fully  your  understanding  of   (a)   revenue, 
(b)  receipts.     Show  wherein  they  differ. 

(a)  Revenue  literally  means  something  that  comes  back. 
Money  is  generally  invested  in  real  estate,  in  business 


186 

ventures,  and  in  corporate  undertakings  with  the  object 
of  obtaining  a  return  for  its  use.  Thus  the  income  from 
the  real  estate,  the  profits  earned  by  a  business,  the  divi- 
dends received  from  corporate  investment  is  termed  Rev- 
enue, or  more  properly  net  Ee venue.  For  we  use  the 
terms  revenue  receipts,  and  revenue  expenditure;  the  ex- 
cess of  the  former  over  the  latter  constituting  net  revenue. 
(&)  Receipts  (cash)  means  cash  actually  received;  cash 
expenditure  being  cash  actually  paid  out — the  excess  of  the 
former  over  the  latter  being  the  amount  of  cash  on  hand 
at  a  certain  date.  The  difference  between  revenue  and 
receipts  is  this:  that  while  revenue  discloses  the  amount 
of  profit  or  net  earnings,  or  net  returns  for  a  given  period, 
the  cash  for  same  need  not  (and  as  a  matter  of  fact  seldom 
is)  have  been  actually  received  at  the  time  the  statement 
is  made  up — consisting  as  it  does  of  outstanding  accounts, 
&c.,  receipts  (cash),  indicate  in  total  the  amount  of  cash 
actually  received,  with  details  of  the  sources  from  which 
they  came. 

227.  Are  there  any  unalterable  rules  governing  the 
trading  and  the  profit  and  loss  accounts  ?  Give  the  general 
acceptation  of  the  terms. 

No — not  as  to  their  division;  for  there  is  no  subject  on 
which  bookkeepers  and  accountants  differ  so  much.  On 
the  other  hand  there  are  certain  basic  principles  on  which 
there  is  a  fairly  general  consensus  of  opinion.  These  may 
be  briefly  stated  as  follows:  The  merchandise  account  is 


187 

supposed  to  show  the  gross  profit  on  trading,  t.  e.f  the  ex- 
cess of  the  selling  price  over  purchase  price  of  goods;  the 
profit  and  loss  account  the  net  profit.  Immediately  these 
elementary  propositions  are  accepted  as  correct  and  prog- 
ress is  made  towards  exact  definition,  differences  of 
opinion  as  to  treatment  arise.  It  appears  to  the  author 
that  the  simpler  the  merchandise  account  is  kept,  the  better 
— for  the  percentage  of  gross  profit  can  be  readily  deter- 
mined from  it  if  variable  charges  are  excluded. 

Merchandise  account  is  usually  charged  with  Inventory 
at  the  beginning  of  a  fiscal  period,  with  goods  returned 
by  customers,  with  freight,  and  discounts  allowed.  It  is 
credited  with  sales,  with  goods  returned  to  creditors  and 
with  discounts  allowed  by  them;  with  the  Inventory  on 
hand  at  end  of  period.  The  excess  of  credit  over  debit 
side  is  called  the  gross  profit  on  Merchandise  or  Trading 
Account.  The  balance  is  transferred  to  Profit  and  Loss 
account  which  (the  P.  &  L.  a/c)  is  also  charged  and  credi- 
ted and  the  balances  of  the  revenue  accounts — and  so  the 
net  profit  arrived  at. 

228.  Suggest  books  for  a  sanitarium  that  is  supported 
by  public  charity. 

The  books  kept  should  be  of  such  a  character  as  to  dis- 
close the  fullest  details  of  income  and  expenditure;  admit 
of  rapid  audit ;  and  disclose  the  financial  position  of  the  in- 
stitution at  any  time. 

The   income   being   derived   from   public   charity — its 


188 

sources  might  be  recorded  under  these  headings:  Annual 
subscriptions;  legacies;  donations.  The  expenditure 
might  be  classified  as  follows :  Food,  medicines,  Doctors' 
fees,  supplies,  salaries  and  wages,  laundry,  repairs,  &c. 
Books  suggested :  Cash  Book,  Journal,  Ledger,  Vouchers 
Payable,  Receipt  books  with  stubs  consecutively  numbered. 
Legacies  and  donations  received  should  each  be  entered  in 
separate  columns  of  cash  book  as  received ;  annual  subscrip- 
tions should  be  charged  to  each  subscriber  in  a  Subscription 
Ledger  through  the  Journal  and  the  total  posted  to  the 
debit  of  Subscription  a/c  (controlling)  in  the  General 
Ledger.  Subscriptions  received  should  be  entered  in  a 
separate  column  in  the  Cash  Book  and  the  total  posted 
monthly  to  the  credit  of  subscription  controlling  a/c;  the 
balance  of  the  account  would  show  the  amount  of  annual 
subscriptions  due.  The  amounts  received  should  be  posted 
in  the  Subscription  Ledger  to  the  credit  of  the  subscriber. 
A  Vouchers  Payable  account  should  be  opened  in  the 
General  Ledger  and  the  voucher  record  kept  in  the  usual 
manner.  All  receipts  should  be  checked  with  receipt  stubs 
through  Cash  Book  into  the  bank,  and  all  payments  covered 
by  returned  checks  and  receipted  vouchers. 

229.  In  what  books  should  an  administrator  keep  his 
accounts?  What,  if  any,  special  rulings  would  you  sug- 
gest ?  Illustrate  and  give  reasons. 

The  following  books  should  be  kept  by  an  administrator : 
Minute  Book  to  contain  copy  of  Will  and  notes  of  court 


189 

proceedings;  Cash  Book  with  separate  column  for  princi- 
pal and  income  receipts  and  expenditure;  Check  Book — 
the  stubs  of  which  may  form  a  subsidiary  journal ;  Journal 
and  Ledger  with  the  ordinary  rulings.  The  method 
adopted  should  naturally  be  double  entry  with  such  ac- 
counts under  properly  classified  headings  as  would  disclose 
readily  the  administrator's  financial  transactions,  and 
facilitate  the  rendering  of  "  an  accounting "  at  any  time 
called  for. 

230.  What  are  the  advantages  of  purchase  journals  and 
sales  journals  ?  How  are  the  transactions  that  are  recorded 
in  such  journals  brought  into  the  general  ledger? 

The  advantages  are  that  the  total  purchases  can  be 
charged  monthly  to  the  Merchandise  account  in  the  general 
ledger  and  credited  to  the  Purchase  ledger  controlling 
account.  The  various  items  in  the  journal  can  be  credited 
to  the  individual  creditors'  accounts  in  the  purchase  ledger 
and  the  total  debited  to  an  account  called  "  general  ledger 
account";  the  purchase  ledger  being  thus  rendered  self- 
balancing,  as  the  total  debit  balance  of  the  "  general  ledger 
account "  will  agree  with  the  total  balances  of  the  creditors 
accounts  and  also  with  the  purchase  ledger  controlling 
account  in  the  general  ledger.  By  the  aid  of  separate 
columns  in  the  journal  and  cash  book — all  note  transac- 
tions, discounts,  allowances,  and  returned  purchases  can 
be  brought  into  account  in  the  same  manner.  The  obvious 
advantages  are  (a)  considerable  labor  saved  in  posting; 


190 

(b)  the  localization  of  errors  in  taking  off  trial  balances; 

(c)  the  ability  of  the  general  ledger  keeper  to  take  off  a 
complete  trial  balance  and  close  the  books  without  waiting 
for  the  proof  of  the  correct  posting  of  the  purchase  ledger 
as  evidenced  by  the  production  of  a  correct  trial  balance  of 
the  accounts  in  the  purchase  ledger.     The  important  fact 
is  not  to  be  overlooked  that  any  attempt  to  "  fix  "  a  trial 
balance  by  the  purchase  ledger  keeper  is  at  once  detecta- 
ble. 

The  reverse  entries  would  be  made  in  the  case  of  sales 
journals,  ledger,  and  general  ledger. 

231.  What  is  a  controlling  account?  Give  an  example 
of  such  an  account.  Answer  fully. 

A  good  answer  to  this  question  is  contained  in  the  last 
paragraph;  but  for  the  sake  of  completeness  an  example 
is  appended. 

Controlling  accounts  are  kept  in  the  general  ledger 
which  show  in  totals  the  amounts  due  to  creditors  and  by 
customers  as  exhibited  in  the  totals  of  individual  accounts 
kept  in  the  purchase  and  sales  ledger.  The  accounts  are 
called  "  controlling  "  because  if  the  items  appearing  in  the 
subsidiary  books  have  been  correctly  footed  and  posted 
the  total  contents  of  each  ledger  must  agree  with  the  totals 
called  for  by  the  general  ledger  accounts. 

Take,  for  instance,  the  Sales  Ledger.  In  the  general 
ledger  an  account  is  opened  designated  controlling  account 
(customers').  At  the  end  of  the  month  the  total  sales  are 


191 


credited  to  merchandise  account  and  credited  to  the 
controlling  account:  returns  are  credited  to  con- 
trolling account  and  debited  to  merchandise;  cash  re- 
ceived and  discounts  allowed  are  credited  to  controlling 
account  and  debited  to  cash  and  discount  accounts  respec- 
tively. The  debit  balance  of  the  controlling  account  at  the 
end  of  every  month  will  show  the  total  amount  due  by  cus- 
tomers standing  open  to  their  respective  accounts  in  the 
Sales  ledger.  The  general  ledger  keeper  accordingly  calls 
on  the  Sales  ledger  keeper  for  an  itemized  list  of  amounts 
due  by  customers  which  in  total  will  exactly  equal  that 
standing  to  the  debit  of  the  account  in  the  general  ledger. 
On  the  other  hand  the  Sales  ledger  bookkeeper  debits  cus- 
tomers with  their  purchases  and  credits  a  "general  ledger 
account  "  in  his  own  ledger.  He  credits  them  with  cash 
receiyed,  discounts  and  allowances,  returns,  notes,  &c.,  and 
debits  same  in  totals  to  the  general  ledger  account  in  the 
Sales  ledger.  When  he  takes  off  his  list  of  balances  the 
total  debits  will  agree  (or  should  agree)  with  the  total 
credit  balance  of  the  general  ledger  account  in  his  own 
ledger,  and  also  with  the  total  debit  balance  of  the  cus- 
tomer^ controlling  account  in  the  general  ledger.  So  the 
Sales  ledger  is  self  -balancing,  i.  e.,  the  bookkeeper  can 
furnish  proof  of  his  own  individual  correctness. 

232.     What  is  a  consignment  account?    How  should  it 
appear  on  the  books  of  the  consignor  ? 

A  consignment  account  is  intended  to  show  the  profit 


192 

or  loss  on  goods  sold  by  one  person  (the  consignee)  belong- 
ing to  another  (the  consignor).  Ordinarily  speaking,  the 
consignor  credits  Merchandise  account  with  goods  consigned 
at  cost  and  charges  the  amount  to  the  consignment  account. 
When  goods  are  reported  sold  the  amount  of  sales  is  credi- 
ted to  the  consignment  account  and  charged  to  the  con- 
signee personally.  His  account  is  credited  with  expenses, 
and  commissions  with  cash  remitted  in  settlement.  The 
consignment  account  is  charged  with  consignee's  expenses 
and  commission,  and  if  the  credit  side  exceed  the  debit 
the  balance  is  the  profit  on  the  consignment — which  is 
closed  into  profit  and  loss  account. 

233.  What  is  a  sinking  fund?  How  should  the  account 
be  treated  on  the  books  of  a  corporation? 

A  sinking  fund  is  an  amount  accumulated  for  a  specific 
purpose  by  setting  aside  from  time  to  time  and  investing 
such  a  sum  as  will  with  interest  in  a  given  time  equal  the 
total  of  a  stated  indebtedness  which  it  was  created  to  dis- 
charge. 

On  the  books  of  a  corporation,  the  amount  of  the  neces- 
sary periodical  contribution  to  the  fund  is  first  ascertained. 
Then  profit  and  loss  account  is  charged  (periodically)  and 
the  Sinking  Fund  account  credited  with  the  amount  so 
ascertained.  Cash  is  now  credited — the  investment  made 
— and  Sinking  Fund  debited  with  same.  When  the  fund 
equals  the  amount  projected — the  fund  is  credited  (cash 
having  been  realized  on  the  investment),,  cash  debited. 


193 

Next,  cash  is  credited  and  the  obligation  indebtedness 
debited  on  discharge  of  same.  The  Sinking  Fund  account 
now  can  be  closed  out  into  surplus  account. 

234.  In  a  set  of  books  in  which  sales  book  and  sales 
ledger  are  used,  how  should  a  sale  of  merchandise  be 
treated  when  an  accepted  draft  for  the  amount  is  given 
by  the  buyer? 

The  sale  would  be  entered  in  the  sales  book,  credited  to 
merchandise  account  and  charged  to  customer  in  the  sales 
ledger.  The  draft  would  be  credited  to  customer's  account 
and  charged  to  Notes  Receivable  Account  in  the  general 
ledger.  This  entry  would  be  made  in  the  journal  with 
full  explanatory  notes  of  the  transaction. 

235.  Define  and  differentiate  the  following  kinds  of 
statements:  (a)  trial  balance,  (b)  balance  sheet,  (c)  state- 
ment of  assets  and  liabilities,  (d)  statement  of  affairs. 

(a)  The  trial  balance  contains  the  balances  of  all  the 
accounts  in  the  ledger;  it  is  designed  to  test  the  accuracy 
of  the  posting  from  books  of  original  entry. 

(&)  After  the  "closing  entries"  have  been  made  a  bal- 
ance sheet  is  drawn  up  containing  a  list  of  all  the  assets 
and  liabilities  of  a  concern ;  if  the  closing  entries  have  been 
made  correctly,  the  total  of  one  side  of  the  balance  sheet 
will  exactly  equal  that  of  the  other. 

(c)  Statement  of  assets  and  liabilities  contains  a  list 
(in  detail)  of  amounts  owned  and  collectable  by  a  firm, 
and  also  of  all  amounts  owed  and  payable  by  a  firm  or 


194 

corporation  exclusive  of  capital  and  profits,  or  capital  stock 
and  surplus. 

(d)  Statement  of  affairs:  a  good  answer  will  be  found 
to  this  in  the  answer  to  question  2. 

236.  State  briefly  the  proper  manner  of  conducting 
the  following  kinds  of  accounts:  (a)  bills  receivable,  (b) 
bills  payable,  (c)  shipment  accounts. 

(a)  Bills  receivable  as  received  from  customers  should 
be  entered  in  note  book  and  credited  to  personal  account 
at  once  and  charged  to  bills  receivable  account.      When 
collected  cash  should  be  debited  and  bills  receivable  credi- 
ted.     If  discounted  a  mark  should  be  put  against  cash 
credited  to  indicate  contingent  liability,  in  the  manner 
before  indicated  in  this  volume. 

(b)  Bills  payable    as    uttered    should   be    charged    to 
parties  to  whom  given,  entered  in  note  book  and  credited 
in  the  ledger  to  bills  payable  account.     When  paid  cash 
should  be  credited  and  notes  payable  account  debited. 

(c)  Shipment  accounts  are  simply  a  combination  of 
merchandise  or  trading  account  with  profit  and  loss  ac- 
count and  they  should  be  treated  accordingly. 

237.  In  what  order  should  the  accounts  be  arranged 
as  they  successively  appear  in  (a)  a  ledger  containing  all 
the  accounts  of  a  business,  (b)  a  ledger  containing  ac- 
counts of  fixed  assets  and  fixed  liabilities,  as  well  as  special, 
nominal  and  summary  accounts? 


195 

(a)  Real  accounts,  nominal  accounts,  accounts  receiva- 
ble, accounts  payable,  capital  accounts. 

(b)  Fixed  assets,  fixed  liabilities,  special,  summary  and 
nominal  accounts,  accounts  receivable,  accounts  payable. 

The  general  principle  which  governs  as  to  the  order  of 
arrangement  is  that  the  one  adopted  most  readily  facilitates 
the  taking  off  of  a  trial  balance  from  which  a  statement 
of  assets  and  liabilities  can  be  accurately  and  expeditiously 
made  up. 

238.  Describe  the  method  of  determining  the  number 
of  shares  of  capital  stock,  both  common  and  preferred,  held 
by  each  of  the  several  stockholders  of  a  corporation,  giving 
fully  the  titles  of  the  books  wherein  the  facts  are  registered 
and  stating  how  the  books  are  opened  and  operated. 

Stock  certificate  book  stubs  should  be  checked  into  stock 
ledger,  and  transfer  book.  The  individual  account  of  each 
stockholder  will  contain  the  amount  of  shares  held  and 
from  this  the  number  of  shares  is  determined.  Separate 
stock  ledger,  transfer  book  and  stock  certificate  book  is 
of  course  provided  for  each  class  of  stock. 

239.  Describe  the  process  of  closing  the  books  of  a  cor- 
poration at  the  end  of  a  fiscal  year,  showing  a  Trading 
account  and  a  Profit  &  Loss  account,  and  explaining  the 
treatment  of  reserves  for  depreciation  and  for  bad  debts, 
as  well  as  for  the  surplus  or  deficiency  resulting  from  the 
operations  of  prior  years. 

The  trading  account  having  been  credited  with  the 
amount  of  the  inventory  if  the  credit  side  exceed  the 


196 

debit  a  gross  profit  is  indicated  which  is  debited  to  trad- 
ing account  and  credited  to  profit  and  loss  account.  The 
net  profit  is  determined  next  by  charging  and  crediting 
the  profit  and  loss  account  with  the  debit  and  credit  bal- 
ances of  the  nominal  accounts. 

Depreciation  is  charged  to  Profit  and  Loss  account — 
a  proper  percentage  for  all  items  subject  thereto  and  either 
deducted  from  the  accounts  or  credited  to  a  Reserve  ac- 
count for  depreciation.  Bad  debts  are  provided  for  by 
charging  profit  and  loss  and  crediting  a  "  reserve  account 
for  bad  debts."  As  an  account  is  proved  to  be  uncollecta- 
ble,  the  reserve  account  is  charged  with  the  amount  and 
the  bad  account  credited,  wiping  it  off  the  books. 

When  provision  lias  been  made  for  the  various  reserve 
accounts,  &c.,  the  balance  is  transferred  to  surplus  account 
— added  to  the  balance  brought  forward  from  the  close  of 
the  last  fiscal  period.  But  if  a  deficiency  account  is  in 
existence  then  the  balance  from  profit  and  loss  account 
would  be  credited  to  it — either  reducing  or  extinguishing 
it. 

240.  A  corporation  is  organized  with  an  authorized 
capital  stock  of  $50,000  of  which  only  $40,000  is  sold,  and 
stock  certificates  issued  therefor.  Two  conflicting  methods 
of  recording  the  capital  stock  on  the  books  are  urged  by 
rival  accountants  as  follows :  (a)  treasury  stock  to  capital 
stock  $50,000,  cash  and  properties  to  treasury  stock 
$40,000;  (6)  cash  anql  properties  to  capital  stock  $40,000. 
Which  method  is  the  better  and  why '? 


197 

The  first  method  (a)  is  preferred,  as  the  total 
authorized  capital  stock  is  brought  into  account  on  the 
books. 

241.  Explain  the  purpose  and  the  manner  of  keeping 
a  private  ledger  as  part  of  the  financial  books  of  a  firm  or 
a  corporation. 

The  purpose  of  keeping  a  private  ledger  is  to  keep  from 
the  knowledge  of  the  general  office  staff  such  details  of 
the  business  as  may  be  deemed  desirable. 

It  is  kept  by  opening  in  the  general  ledger  a  private 
ledger  controlling  account  to  which  is  posted  the  total 
balance  of  those  accounts  which  are  posted  in  detail  in  the 
private  ledger.  Separate  columns  in  cash  book,  &c., 
enable  this  to  be  done  with  facility. 

242.  A  construction  company  contracts  to  erect  build- 
ings or  works,  charging  in  some  instances  a  fixed  price, 
and  in  other  instances  the  actual  cost  plus  a  fixed  per- 
centage thereon.      How  should  the  contract  accounts  for 
each  stated  class  of  undertakings  be  conducted  on  the  books 
of  the  company,  and  in  what  manner  should  the  unfinished 
contracts  at  the  close  of  each  fiscal  year  be  valued  on  the 
balance  sheet  and  treated  in  the  Profit  &  Loss  account? 

In  the  first  case  a  special  contract  account  should  be 
opened  for  each  job;  charged  with  all  cost  outlays  and 
credited  with  the  contract  price — excess  of  price  charged 
over  costs  is  the  profit  on  the  contract  and  should  be 
credited  to  profit  and  loss  account.  The  expenditure  on 


198 

any  unfinished  contracts  of  this  class  should  only  appear 
on  the  balance  sheet  as  "  expenditure  on  contracts  in  prog- 
ress." 

In  the  second  case  the  amount  of  percentage  of  actual 
cost  might  be  fairly  credited  to  the  contract — the  amount 
of  profit  up  to  date  arrived  at  and  transferred  to  the  credit 
of  profit  and  loss  account. 

243.  Define  and  differentiate  the  following  kinds  of 
accounts:  (a)  real  and  nominal,  (b)  personal  and  imper- 
sonal,   (c)    current   and   summary,    (d)    controlling   and 
specific. 

(a)  Real — things  of  value. 

Nominal — records  of  income  and  expenditure. 

(b)  Personal — with  persons. 
Impersonal — all  others. 

(c)  Current — running — active. 
Summary — totals . 

(d)  Controlling — totals  of  balances  of  other  ledgers. 
Specific — exact — real  or  personal. 

244.  How  may  a  reserve  account  and  a  sinking  fund, 
both  relating  to  the  redemption  of  the  same  debt,  be  simul- 
taneously operated  ?    What  purpose  is  accomplished  thereby 
and  how  do  said  accounts  respectively  appear  on  the  bal- 
ance sheet? 

A  complete  answer  is  given  to  this  previously.  Briefly 
the  fund  represents  value — cash  or  investments,  and  is  an 
asset;  the  account  is  a  liability  and  appears  as  such  on  the 


199 

balance  sheet.    When  the  liability  is  discharged  for  which 
the  fund  was  created,  the  reserve  account  becomes  surplus. 

245.  A  manufacturer  makes  extensive  investments  in 
stocks  and  bonds,  buying  and  selling  from  time  to  time 
as  the  market  conditions  warrant  and  clearing  all  such 
transactions  through  his  regular  books  of  account.  How 
should  such  transactions  be  isolated  from  his  manufactur- 
ing operations  and  what  books  and  accounts  should  he 
employ  to  record  the  details  of  the  principal  and  income 
from  such  investments? 

He  should  have  a  bonds  and  stocks  ledger  properly  ruled 
to  record  purchase  sales  price  and  interest.  A  controlling 
account  in  the  general  ledger — a  separate  column  in  the 
general  cash  book — and  a  stocks  and  bonds  ledger.  A 
separate  ledger  account  could  also  be  opened  for  income. 

246.  A  manufacturing  concern  having  increased  its 
capital  and  invested  considerable  money  in  new  machinery 
and  in  the  reconstruction  of  old  machinery,  removes  to 
a  new  location  and  charges  the  cost  of  moving  and  the 
reconstruction  of  its  old  machinery  to  one  account  termed 
"  Installation."  Explain  fully  how  this  account  should 
be  treated  in  closing  the  books  of  the  company  and  give 
your  reasons. 

The  lumping  of  the  charges  for  moving  expenses  and 
the  cost  of  reconstructing  the  old  machinery  should  not 
have  occurred  at  all.  They  should  have  been  taken  ac- 
count of  separately.  However,  as  they  are  both  included 
in  the  "  Installation  account,"  it  seems  to  me  to  be  neces- 


200 


to  separate  them,,  writing  off  the  expenses  of  moving 
against  the  Revenue  at  once,  and  while  the  same  procedure 
should  be  followed  with  the  Reconstruction  items,  except 
that,  if  the  amount  should  be  considerable  it  could  be 
spread  over  a  period  of  say  four  quarterly  amounts,  in- 
stead of  being  written  off  at  once,  but  it  should  be  charged 
against  Revenue  as  soon  as  it  can  be  done  conveniently  for 
this  reason,  since  no  addition  or  improvement  of  the  plant 
is  indicated. 

247.  In  closing  books  how  would  you  value  the  goods 
owned  by  your  client  and  consigned  at  selling  prices  to 
customers  of  your  client,  under  an  agreement  by  which  the 
customers  pay  for  the  goods  as  used?  Give  reasons. 

1***s 
When  the  goods  are  consigned  to  a  customer  to  be  paid 

for  as  used  it  would  be  best  to  debit  a  "  consignment  ac- 
count" with  the  amount  so  consigned,  and  have  the  cus- 
tomers render  a  statement  either  weekly  or  monthly,  show- 
ing (a)  the  amount  on  hand  at  the  beginning  of  the  period, 
(b)  the  amount  of  sales  during  the  period,  (c)  the  amount 
of  merchandise  on  hand  at  the  end  of  the  period  and  have 
them  accompany  the  same  with  a  remittance  covering  the 
amount  sold.  It  would  then  be  easily  ascertainable,  for 
inventory  purposes,  (a)  what  amount  of  goods  had  been 
sold,  against  the  original  amount  consigned,  and  (&)  ex- 
actly how  much  was  "  on  hand  "  in  the  custody  of  the  cus- 
tomer. The  main  idea  being  that  the  client  be  fully  aware 
at  the  close  of  each  period  the  exact  amount  of  the  goods 


'201 

consigned,  that  had  been  sold,  so  as  not  to  falsely  or  erro- 
neously swell  the  sales  a/c. 

248.  Name  seven  kinds  of  ledgers  and  briefly  state  the 
use  of  each  kind. 

(a)  General  Ledger  for  recording  the  general  results  of 
a  business;  the  sales  and  purchases,  and  perhaps  certain 
special  or  private  information  being  kept  in  other  books 
as  hereafter  described. 

(b)  Sales  Ledger.     Being  a  ledger  kept  for  customers 
accounts  only  and  which  can  be  balanced  and  controlled 
by  a  controlling  a/c  in  the  general  ledger. 

(c)  Purchase  Ledger.   A  book  kept  for  recording  pur- 
chase accounts  of  merchandise,  &c.,  and  also  kept  in  the 
general  system  by  means  of  a  controlling  a/c. 

(d)  Private  Ledger,  for  information  as  to  partnership 
settlements,  capital  investments,  &c.,  which  it  is  not  desira- 
ble for  the  office  staff  to  see. 

(e)  Investment    Ledger,    for    recording    investments, 
mortgages,   stocks  or  bonds,    (e)    can  also   be   combined 
with  (ft7). 

(/)  Stock  Ledger,  used  by  corporations  to  record  names 
of  stockholders  and  number  of  shares  held  by  each,  &c. 

(g)  Depositors'  ledger,  used  by  banks  and  trust  com- 
panies to  record  the  accounts  of  customers  of  the  bank. 

249.  Define  cost  accounts  of  a  manufacturing  business 
and  state  what  information  they  furnish.      Distinguish 


202 

between  manufacturing  or  factory  costs  and  commercial  or 
selling  costs. 

Cost  accounts  are  a  history  of  the  various  stages  of  man- 
ufacturers' accounts,  and  the  cost  of  manufacturing  an 
article,  or  articles  of  a  certain  class,  from  the  receipt  of 
the  raw  material,  up  to  ttie  time  of  the  arrival  of  the 
finished  product,  at  the  salesrooms.  Manufacturing  cost 
differs  from  selling  costs  in  that  the  latter  involves  only 
the  costs  of  selling  the  finished  product,  such  as  rent  of 
salesroom,  hire  of  clerks  and  salesmen,  advertising,  light- 
ing and  heating  of  the  salesroom,  and  similar  items  re- 
lating thereto.  In  the  case  of  a  concern  doing  its  manu- 
facturing and  selling  under  the  same  roof  great  care  must 
be  taken  to  obtain  a  proper  and  equitable  distribution  of 
the  expenses,  so  as  to  give  both  the  manufacturing  and  the 
selling  departments  their  correct  proportions. 

250.  What  method  would  you  recommend  for  record- 
ing the  cash  receipts  on  the  general  cash  book  of  a  com- 
pany operating  10  branch  houses,  each  depositing  its  daily 
receipts  in  a  separate  bank?  Describe  fully. 

The  best  method  would  seem  to  be  to  have  the  cash 
book  ruled  with  10  (extra)  columns,  one  for  each  branch, 
in  addition  of  course  to  the  regular  columns,  the  totals 
of  these  extra  columns  could  then  be  posted  at  the  end 
of  each  week  or  month,  as  the  case  may  be,  and  thus 
achieve  the  same  result  with  less  labor. 


203 

251.  What  are  the  principal  differences  between  a  trial 
balance  taken  before  the  books  are  closed  and  one  taken 
directly  after  they  are  closed  ? 

The  first  is  called  a  trial  balance,  and  the  latter  a  bal- 
ance sheet,  the  distinction  lying  in  the  fact  that  the  trial 
balance  merely  presents  a  list  of  all  the  open  accounts  on 
the  ledger,  at  the  time,  the  object  being  to  ascertain  if  the 
books  are  in  balance  which  state  of  equilibrium  is  taken 
to  indicate  that  the  mechanical  part  of  the  work  under 
review  has  been  correctly  performed.  The  Balance  Sheet, 
on  the  other  hand,  represents  the  open  accounts  on  the 
ledger,  after  the  operating  accounts,  such  as  rent,  salaries, 
wages,  light,  heat,  freight  and  express,  interest,  discount, 
expense,  &c.,  &c.,  have  been  written  off  to  profit  and  loss 
the  object  being  to  show  nothing  but  assets  on  one  side 
and  liabilities  on  the  other. 

252.  Give  the  names  of  the  general  accounts  to  be  used 
and  state  briefly  how  you  would  proceed  to  open  a  set  of 
books  for  the  receiver  of  a  small  manufacturing  concern, 
the  court  having  issued  an  order  that  the  receiver  shall 
continue  manufacturing  in  order  to  utilize  to  the  best  ad- 
vantage the  work  in  process  and  the  raw  material. 

The  amount  of  raw  material,  and  material  in  process  of 
manufacture  being  first  ascertained,  I  would  debit  an  ac- 
count for  Eaw  material  with  the  amount  of  same  as  dis- 
closed by  the  inventory,  and  also  open  an  account  for 
the  work  in  process  as  the  work  was  completed  it  would 


204 

gradually  find  its  way  into  the  Finished  Mdse.  a/c  which 
would  have  to  be  opened,  and  the  other  two  accounts 
would  thereupon  gradually  disappear.  Accounts  would 
also  have  to  be  opened  for  salaries,  wages,  light,  heat,  and 
other  expenses  incidental  to  the  cost  of  manufacturing  and 
selling,  and  if  it  was  necessary  to  show  the  separate  cost 
of  manufacturing  and  selling  great  care  would  have 
to  be  exercised  in  the  distribution  of  these  items  to  record 
the  results. 

253.  Would  you  consider  it  proper  to  include  as  an 
asset  the  following  items:  insurance  premium  unearned, 
taxes  paid  in  advance,  advertising  expenses?      Explain 
briefly  and  give  reasons. 

Yes,  because  these  items  are  usually  paid  long  in  ad- 
vance, and  it  would  be  unfair  for  one  quarter  for  instance 
to  carry  the  other  three-quarters'  share  of  these  items.  The 
items  ought  to  be  taken  into  consideration  unless  they 
should  happen  to  be  very  small  and  unimportant,  and  no 
objection  is  made  by  the  persons  interestod. 

254.  State  how  you  would  proceed  to  analyze  the  ac- 
counts in  a  ledger,  giving  reasons  for  the  methods  you 
would  employ. 

By  analysis,  I  presume,  is  meant  to  dissect  and  arrange 
the  accounts  in  a  ledger,  on  a  separate  sheet  ruled  with  col- 
umns as  in  a  case,  for  example,  where  the  books  had 
been  carelessly  kept.  The  mode  of  procedure  is  to  take 
each  book  of  original  entry  and  post  the  amounts  there- 


205 

from  to  this  analysis  sheet,  under  the  name  of  the  particu- 
lar account  affected;  in  a  third  column,  or  balance  col- 
umn, the  excess  of  debits  or  credits  should  be  stated  and 
these  total  amounts,  after  this  method  has  been  followed 
out  with  all  the  other  books  of  original  entry  plus  the  bal- 
ance, at  the  starting  point  of  the  period  under  review,  ought 
to  exactly  balance.  Errors  or  differences  in  the  amounts 
at  the  debit  or  credit  of  the  various  accounts  can  also  be  in- 
stantly discovered,  after  an  analysis  has  been  made,  but  in  a 
case  where  there  are  a  great  many  entries  the  process  is  a 
most  expensive  one,  and  not  often  attempted  for  this 
reason. 

255.  Describe  a  system  of  bookkeeping  by  which  the 
errors  in  a  trial  balance  may  be  localized. 

Errors  in  the  trial  balance,  if  they  can  be  localized  at  all, 
can  only  be  localized  to  a  certain  extent  by  means  of  the 
controlling  account.  By  running  a  special  column  or  col- 
umns in  the  cash  book,  and  in  such  other  books  of  original 
entry  that  may  be  benefited  by  the  method,  an  error  may 
be  traced  to  a  particular  book  or  books. 

256.  State  briefly  how,  at  the  close  of  the  fiscal  year, 
you  would  proceed  to  determine  the  value,  for  inventory 
purposes,  of  the  machinery  and  tools  of  a  manufacturing 
establishment. 

They  may  be  valued  at  cost,  less  a  certain  percentage 
for  Depreciation,  which  amount  of  depreciation  ought  to 
be  determined  in  each  individual  case  by  a  careful  consid- 


206 

eration  of  the  character  of  the  machinery  and  tools,  the 
wear  and  tear  that  they  are  subjected  to  in  the  course  of 
their  use,  and  the  probable  extent  of  their  usefulness. 
Another  way  would  be  to  have  an  authority  on  such  mat- 
ters make  a  disinterested  appraisal  of  their  value. 

257.  In  making  up  a  statement  of  profit  and  loss,  where 
would  you  show  (a)  cash  discount  allowed  customers  for 
the  prompt  payment  of  bills,  (b)  cash  discount  deducted 
in  payment  of  invoices  by  your  clients?     Explain  briefly 
and  give  reasons. 

Under  modern  accounting  methods  the  proper  way  would 
be  to  run  a  special  column  for  discounts,  on  both  sides  of 
the  cash  book  (a)  the  one  for  cash  discount  allowed  cus- 
tomers ought  to  be  on  the  debit  side  of  the  cash  book,  and 
headed  Discount  Or.;  at  the  end  of  the  month  the  total 
of  this  column  should  be  posted  to  the  debit  of  the  Dis- 
count Account,  (b)  Cash  discount  for  invoices,  should 
be  entered  in  the  special  discount  column  on  the  credit 
side  of  the  cash  book,  and  at  the  end  of  the  month  the  total 
should  be  posted  to  the  credit  of  the  Discount  Account  in 
the  ledger. 

258.  In  closing  the  books  of  a  firm  it  is  found  that  the 
accounts  receivable  include  $5,000  of  worthless  accounts 
and  $10,000  of  doubtful  accounts.      The  firm  decides  to 
deduct  from  the  gross  profits  $15,000  for  these  items. 
What  would  you  consider  the  best  method  of  carrying  these 
items  on  the  general  ledger? 

The  $5,000  worth  of  "worthless  accounts,"  being  abso- 


207 


lutely  worthless,  there  is  no  object  in  giving  them  further 
consideration;  therefore  a  simple  entry,  such  as: 

Profit  and  Loss  a/c,  $5,000.  To  Accts.  Rec.,  $5,000. 
Stating  the  full  particulars,  of  course,  would  seem  to 
meet  this  requirement.  The  $10,000  of  Doubtful  Ac- 
counts, however,  since  the  stipulation  is  made  that  they 
are  doubtful,  ought  to  be  charged  to  Profit  and  Loss  but 
credited  to  a  Reserve  for  Bad  Debts  a/c,  and  as  the  items 
which  comprise  the  account  are  discovered  to  be  really 
worthless  they  could  be  written  off. 

259.  A  corporation  authorizes  an  issue  of  $1,000,000 
of  bonds.  The  trust  company  issues  and  certifies  $500,000 
of  these  bonds  to  December  31,  1907.  On  this  date  the 
company  sells  $200,000  of  bonds,  pledges  $200,000  as  col- 
lateral security  for  the  payment  of  its  notes  and  has 
$100,000  in  the  treasury.  How  should  this  issue  of  bonds 
appear  on  the  balance  sheet  of  the  corporation  on  Decem- 
ber 31,  1907? 

The  bonds  issued  to  the  trust  company  should  appear 
as  "Certified  by  —  -  Trust  Co/'  The  $200,000 

worth  that  were  sold  will  of  course  go  to  the  credit  of 
the  Treasury  a/c,  and  appear  in  the  cash  balance  by  debit- 
ing the  cash.  The  $200,000  that  was  pledged  as  collateral 
should  be  deducted  from  the  liabilities  and  the  balance 
should  appear  just  as  it  is,  $100,000  Bonds  in  the  Treas- 
ury. No  provision  is  made  here  either  for  premium  or 
discount  so  it  is  taken  for  granted  that  the  bonds  were 
issued  at  par. 


£08 


260.  Write  out  in  detail  the  general  instructions  for 
taking  the  inventory  of  raw  materials,  work  in  process 
and  finished  goods  of  a  small  company  manufacturing  au- 
tomobiles. Show  the  general  divisions  that  the  inventory 
requires  and  provide  against  errors  in  recording  the  items. 

Eaw  material  is  to  be  valued  at  cost  plus  carriage 
charges  and  labor,  &c.,  in  unpacking  and  putting  in  store- 
house. 

Work  in  process  should  be  the  raw  material,  plus  what- 
ever charges  there  are  for  salaries,  wages,  &c.,  to  bring 
it  to  the  present  stage  of  production  (construction),  as 
well  as  such  a  proportion  of  Rent,  Heat,  Light,  &c.,  as 
may  be  deemed  desirable  to  charge  to  this  part  of  the 
work. 

The  finished  product  should  be  valued  at  cost. 

The  general  divisions  that  the  inventory  would  require 
are  about  as  follows: 


BLANK   AUTOMOBILE   CO. 


Quantity. 

Description. 

Unit   " 
Price. 

Amount. 

Total. 

Raw  Material: 
Merchandise  



•• 

Freight,  express,  ?.  . 
Labor,  handling,   ?. 

Work  in  Process: 
Merchandise  
Salaries,  wages,  ?  .  .  . 
Light,  heat,  rent,  ?  . 
Other  expenses 

Finished  Material: 
?  Automobiles 

Tools,  implements  
Lamps,  horns,  ?  

209 

Of  course  no  two  cases  are  alike ;  so  each  one  would  have 
to  be  taken  according  to  its  own  peculiar  characteristics. 
The  only  way  to  provide  against  error  is  to  have  one  count 
the  items  and  compare  the  prices  given  with  those  on  in- 
voices, and  another  to  extend  and  foot  the  sheets. 


INDEX. 

Accounts :  PAGE  NOS. 

Administrators' 188 

Nominal    16,   17,   79 

Personal   16,  78 

Real 16,  17,  79 

Kevenue    10,   16 

Analyses  of  a  ledger 17,  204 

Assets : 

Captial    59,  181 

Cash  159 

Current 117,  159,  181 

Fixed 16,  60,  181 

Floating     83 

Passive    • 100 

Permanent    83 

Quick     100 

Auditing — Definition  of   88 

Auxiliary  Books  166 

Averaging  Accounts  105 

Eule  for    105 

Bad  debts — how  disposed  of 25 

Balance  Sheet 8,  118,  193 

Continental  form   83 

English  form    83 

Description  of  83,  193 

Order  of  items   184,  195 

210 


211 

PAOB'NOS. 

Bills  Receivable 27,  56,  137,  194 

Payable    27,  194 

Bonds : 

Debenture 48 

Income     . 47 

Mortgage    48 

Bookkeeping : 

Definition  of  88 

Essential  principles  of  double  entry 7 

Branch  house  account 176 

Brewery  bookkeeping 171 

Change  from  single  to  double-entry  ...  30,  64,  120 
Advantages  of  single  over  double- 
entry  73,  74,  85,  98,  115 

Theory  of   115 

Capital : 

Definition  of   16,  19,  118 

Expenditure 12 

Fixed    100,   155 

Floating   99,  155 

Loan   16 

Nominal     • 118 

Receipts   12 

Share 20 

Stock 19,  47 

Working 32 

Cash: 

Accounts    45 

Assets 16 

Books  26,  55,  124 

Closing  the  books 108,  143,  195 


213 

PAGE  N08. 

Columnar  system 12,  24,  139 

Cash  book   96 

Journal    96 

Sales  book   96 

Commission  Merchants'  books 35,  76 

Common  Stock  67 

Consignment  accounts   125 

Construction  account 20,  79,  133,  177 

Contingent  fund 18 

Contingent  liabilities 105,  150 

Controlling  accounts 90,  163,  190 

Customers'    14 

Creditors'     14 

Credit — definition  of  57 

Creditor   57 

Cost  accounts 36,  69,  123,  129,  202 

Current  account  19 

Deficiency    19 

Account    - 11 

Debit — definition  of 57 

Debtor    57 

Depreciation 102,  179 

Account    • 179 

Fund    18 

Diminishing  assets  148 

Dividend  accounts   22,  135 

Doubtful  debts   25 

Executors'  accounts  72,  114,  147 

Expense  accounts   21 


213 

PAGE   NOB 

Factory  accounts    113 

Fixed  Capital   100 

Fixed  charges   16,  41,  136 

Floating  capital    100 

Floating  indebtedness 16,  40,  41,  136,  160 

Franchise  accounts 177 

Funded  debt 136,  160 

Funds : 

Contingent     18 

Depreciation 18,  69,  102 

Investment    18 

Eedemption    68,  198 

Reserve 68,  82,  102 

Sinking 82,  89,  102,  192 

Surplus    114 

General  Ledger 39 

Good  Will: 

Definition  of  38,  53,  118 

How  valued 38,  53,  110 

Theory  of    110 

Gross  Profit    99 

Impersonal  accounts  '. .   16,  166 

Income  account 39 

Bonds   • 47 

Interest  accounts 45,  117 

Inventories — how  treated,  etc 112,  138 

Investment  fund    18 

Joint  accounts  .....  , 21 


214 

PAGE  NOS. 

Journal — use  of 30 

Purchase  189 

Sales  189 

Journalizing  97 

Kule  for 106 

Ledgers : 

Accounts — how  divided  116 

Doubtful  debts   25 

Forms  of   104,  201 

General    39 

Petty  sales 145 

Private  39,  81,  87 

Purchase    39 

Sales   39,  84 

Self-balancing  124 

Stock  or  shares 31,  39,  95,  103 

Liabilities   60,  79 

Current 118 

Fixed   16 

Floating 16,  40,  41 

Passive     100 

Loan  capital   • 16 

Maintenance  account 20,  135,  136 

Merchandise  account   20,  29,  45,  74,  119 

Minute  book   112 

Mortgage  bonds    • 48 

Net  Profit  103 

Nominal  accounts  .  16,  17 


215 

PAOX  N08. 

Opening  a  set  of  books 101 

Operating  expenses    16 

Original  entry — books  of 108 

Patents     _ 16,   177 

Pay-roll — self-proving    157 

Personal  accounts  16 

Petty  cash — system  of  handling 94 

Use  of  109 

Preferred  stock 19,  47,  67 

Private  Ledger 39,  81,  87,  121,  138,  197 

Profit  and  Loss  account 11;  42,  43,  81,  125, 186 

Purchase  Ledger 39,  180 

Real  accounts 16,  17 

Eeal  estate  accounts  16,  17,  118 

Eealization  and  liquidation  accounts   8 

Receipts  and  Revenue — difference  between 185 

Reserve  account : 

Fund 18 

Secret 152 

Resources    » . . .     79 

Revenue : 

Account 10,  16 

Description  of  15,  185 

Expenditure    15 

Sales  Ledger — forms  of   84 

Self-proving  pay-roll  157 

Share,  capital  20 

Sinking  fund 18,  192 


216 

PAGE  N08. 

Statement  of  affairs  20,  193 

Statement  of  assets  and  liabilities 133,  146,  193 

Statement  of  income  and  expenditure 13 

Statement  of  receipts  and  expenditure 13 

Statistics — comparative    171 

Stock  Ledger 31,  39,  95,  103 

Subscription  account 21,  80,  114 

Surplus 102,  114,  119 

Surplus  account   19,  39,  69 

Surplus  fund 114 

Suspense  account 21,  40,  45,  135 

Transfer  book  167 

Trading  account 10,  79,  110,  186 

Treasury  stock   135 

Trial  balance 8,  74,  193 

Description  of 132 

Detection  of  errors 28,  132,  205 

Process  of  taking 48,  92 

Venture  account 21 

Voucher  record  system  52,  70,  75,  156 

Advantages  and  disadvantages   183 

Description  of 70 


account 157 

Watered   stock    67 

Working  capital   32 


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